Tax Case Digests
before the effectivity of the LGC (1992). Besides, nothing can
1st Batch
MCIAA VS MARCOS (1996)
FACTS:
Since the time of its creation, petitioner MCIAA enjoyed the
privilege of exemption from payment of realty taxes in
accordance with Section 14 of its Charter. However, Mr.
Eustaquio B. Cesa, Officer-in-Charge, Office of the Treasurer of
the City of Cebu, demanded payment for realty taxes on several
parcels of land belonging to the petitioner.
Petitioner objected to such demand for payment as baseless and
unjustified because of the following reasons:
1. The aforecited Section 14 of RA 6958 which exempt it
from payment of realty taxes;
2. It was also asserted that it is an instrumentality of the
government performing governmental functions, citing
section 133 of the Local Government Code of 1991
which puts limitations on the taxing powers of local
government units.;
3. That being an instrumentality of the National
Government, respondent City of Cebu has no power nor
authority to impose realty taxes upon it in accordance
with the aforesaid Section 133 of the LGC, as explained
in Basco vs. Philippine Amusement and Gaming
Corporation (decided 1991): Local governments have
no power to tax instrumentalities of the National
Government.
Respondent City refused to cancel and set aside petitioner's
realty tax account, insisting that the MCIAA is a government-
controlled corporation whose tax exemption privilege has been
withdrawn by virtue of Sections 193 and 234 of the Local
Governmental Code that took effect on January 1, 1992:
Sec. 193. Withdrawal of Tax Exemption Privilege. Unless
otherwise provided in this Code, tax exemptions or incentives
granted to, or presently enjoyed by all persons whether natural
or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly
registered under RA No. 6938, non-stock, and non-profit
hospitals and educational institutions, are hereby withdrawn
upon the effectivity of this Code. (Emphasis supplied)
Sec. 234. Exemptions from Real Property taxes. (c) Except as
provided herein, any exemption from payment of real property
tax previously granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or
controlled corporations are hereby withdrawn upon the
effectivity of this Code.
ISSUE:
Whether or not the petitioner MCIAA is a taxable person.
HELD:
The petitioner cannot claim that it was never a "taxable person"
under its Charter. It was only exempted from the payment of
real property taxes. The grant of the privilege only in respect of
this tax is conclusive proof of the legislative intent to make it a
taxable person subject to all taxes, except real property tax.
Even if the petitioner was originally not a taxable person for
purposes of real property tax, xxx it had already become even if
it be conceded to be an "agency" or "instrumentality" of the
Government, a taxable person for such purpose in view of the
withdrawal in the last paragraph of Section 234 of exemptions
from the payment of real property taxes, which, xxx applies to
the petitioner.
Accordingly, the position taken by the petitioner is untenable.
Reliance on Basco vs. Philippine Amusement and Gaming
Corporation (decided 1991) is unavailing since it was decided
prevent Congress from decreeing that even instrumentalities or
agencies of the government performing governmental functions
may be subject to tax. Where it is done precisely to fulfill a
constitutional mandate and national policy, no one can doubt its
wisdom.
Petition is DENIED.
CHAMBER OF REAL ESTATE AND BUILDERS'
ASSOCIATIONS, INC. v. ALBERTO ROMULO
[G.R. 160756 March 9, 2010]
In this case, petitioner Chamber of Real Estate and Builders
Associations, Inc. is questioning the constitutionality of Section
27 (E) of Republic Act (RA) 84242 and the revenue regulations
(RRs) issued by the Bureau of Internal Revenue (BIR) to
implement said provision and those involving creditable
withholding taxes.3
Petitioner is an association of real estate developers and
builders in the Philippines. It impleaded former Executive
Secretary Alberto Romulo, then acting Secretary of Finance
Juanita D. Amatong and then Commissioner of Internal Revenue
Guillermo Parayno, Jr. as respondents.
Petitioner assails the validity of the imposition of minimum
corporate income tax (MCIT) on corporations and creditable
withholding tax (CWT) on sales of real properties classified as
ordinary assets.
Section 27(E) of RA 8424 provides for MCIT on domestic
corporations and is implemented by RR 9-98. Petitioner argues
that the MCIT violates the due process clause because it levies
income tax even if there is no realized gain.
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by
RR 6-2001) and 2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii)
of RR 7-2003, all of which prescribe the rules and procedures for
the collection of CWT on the sale of real properties categorized
as ordinary assets. Petitioner contends that these revenue
regulations are contrary to law for two reasons: first, they ignore
the different treatment by RA 8424 of ordinary assets and
capital assets and second, respondent Secretary of Finance has
no authority to collect CWT, much less, to base the CWT on the
gross selling price or fair market value of the real properties
classified as ordinary assets.
Petitioner also asserts that the enumerated provisions of the
subject revenue regulations violate the due process clause
because, like the MCIT, the government collects income tax
even when the net income has not yet been determined. They
contravene the equal protection clause as well because the CWT
is being levied upon real estate enterprises but not on other
business enterprises, more particularly those in the
manufacturing sector.
Issues:
1. WON the imposition of the MCIT on domestic corporations is
unconstitutional
2. WON THE Secretary of Finance has the authority to order the
collection of CWT on sales of real property considered as
ordinary assets
3. WON the imposition of CWT on GSP/FMV of real estate
classified as ordinary assets deprives its members of their
property without due process of law
Ruling:
The MCIT on domestic corporations is a new concept introduced
by RA 8424 to the Philippine taxation system. It came about as a
result of the perceived inadequacy of the self-assessment
system in capturing the true income of corporations. It was
devised as a relatively simple and effective revenue-raising
instrument compared to the normal income tax which is more
difficult to control and enforce. It is a means to ensure that
1
everyone will make some minimum contribution to the support
of the public sector.
Taxes are the lifeblood of the government. Without taxes, the
government can neither exist nor endure. The exercise of taxing
power derives its source from the very existence of the State
whose social contract with its citizens obliges it to promote
public interest and the common good.
Taxation is an inherent attribute of sovereignty. It is a power
that is purely legislative. Essentially, this means that in the
legislature primarily lies the discretion to determine the nature
(kind), object (purpose), extent (rate), coverage (subjects) and
situs (place) of taxation. It has the authority to prescribe a
certain tax at a specific rate for a particular public purpose on
persons or things within its jurisdiction. In other words, the
legislature wields the power to define what tax shall be
imposed, why it should be imposed, how much tax shall be
imposed, against whom (or what) it shall be imposed and where
it shall be imposed.
As a general rule, the power to tax is plenary and unlimited in its
range, acknowledging in its very nature no limits, so that the
principal check against its abuse is to be found only in the
responsibility of the legislature (which imposes the tax) to its
constituency who are to pay it. Nevertheless, it is circumscribed
by constitutional limitations. At the same time, like any other
statute, tax legislation carries a presumption of constitutionality.
The constitutional safeguard of due process is embodied in the
fiat "[no] person shall be deprived of life, liberty or property
without due process of law." In Sison, Jr. v. Ancheta, et al., we
held that the due process clause may properly be invoked to
invalidate, in appropriate cases, a revenue measure when it
amounts to a confiscation of property. But in the same case, we
also explained that we will not strike down a revenue measure
as unconstitutional (for being violative of the due process
clause) on the mere allegation of arbitrariness by the taxpayer.
There must be a factual foundation to such an unconstitutional
taint. This merely adheres to the authoritative doctrine that,
where the due process clause is invoked, considering that it is
not a fixed rule but rather a broad standard, there is a need for
proof of such persuasive character.
Petitioner is correct in saying that income is distinct from capital.
Income means all the wealth which flows into the taxpayer other
than a mere return on capital. Capital is a fund or property
existing at one distinct point in time while income denotes a
flow of wealth during a definite period of time. 45 Income is gain
derived and severed from capital. For income to be taxable, the
following requisites must exist:
(1) there must be gain;
(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from
taxation.
Certainly, an income tax is arbitrary and confiscatory if it taxes
capital because capital is not income. In other words, it is
income, not capital, which is subject to income tax. However,
the MCIT is not a tax on capital.
The MCIT is imposed on gross income which is arrived at by
deducting the capital spent by a corporation in the sale of its
goods, i.e., the cost of goods and other direct expenses from
gross sales. Clearly, the capital is not being taxed.
Furthermore, the MCIT is not an additional tax imposition. It is
imposed in lieu of the normal net income tax, and only if the
normal income tax is suspiciously low. The MCIT merely
approximates the amount of net income tax due from a
corporation, pegging the rate at a very much reduced 2% and
uses as the base the corporation's gross income.
Taxation is necessarily burdensome because, by its nature, it
adversely affects property rights.
Petitioner alleges that RR 9-98 is a deprivation of property
without due process of law because the MCIT is being imposed
and collected even when there is actually a loss, or a zero or
negative taxable income.
RR 9-98, in declaring that MCIT should be imposed whenever
such corporation has zero or negative taxable income, merely
defines the coverage of Section 27 (E). This means that even if a
corporation incurs a net loss in its business operations or reports
zero income after deducting its expenses, it is still subject to an
MCIT of 2% of its gross income. This is consistent with the law
which imposes the MCIT on gross income notwithstanding the
amount of the net income. But the law also states that the MCIT
is to be paid only if it is greater than the normal net income.
Obviously, it may well be the case that the MCIT would be less
than the net income of the corporation which posts a zero or
negative taxable income.
2. The Secretary of Finance is granted, under Section 244 of RA
8424, the authority to promulgate the necessary rules and
regulations for the effective enforcement of the provisions of the
law. Such authority is subject to the limitation that the rules and
regulations must not override, but must remain consistent and
in harmony with, the law they seek to apply and implement. It
is well-settled that an administrative agency cannot amend an
act of Congress.
We have long recognized that the method of withholding tax at
source is a procedure of collecting income tax which is
sanctioned by our tax laws. The withholding tax system was
devised for three primary reasons: first, to provide the taxpayer
a convenient manner to meet his probable income tax liability;
second, to ensure the collection of income tax which can
otherwise be lost or substantially reduced through failure to file
the corresponding returns and third, to improve the
government's cash flow. This results in administrative savings,
prompt and efficient collection of taxes, prevention of
delinquencies and reduction of governmental effort to collect
taxes through more complicated means and remedies.
Respondent Secretary has the authority to require the
withholding of a tax on items of income payable to any person,
national or juridical, residing in the Philippines. Such authority is
derived from Section 57 (B) of RA 8424
3. Petitioner avers that the imposition of CWT on GSP/FMV of
real estate classified as ordinary assets deprives its members of
their property without due process of law because, in their line
of business, gain is never assured by mere receipt of the selling
price. As a result, the government is collecting tax from net
income not yet gained or earned.
Again, it is stressed that the CWT is creditable against the tax
due from the seller of the property at the end of the taxable
year. The seller will be able to claim a tax refund if its net
income is less than the taxes withheld. Nothing is taken that is
not due so there is no confiscation of property repugnant to the
constitutional guarantee of due process. More importantly, the
due process requirement applies to the power to tax. The CWT
does not impose new taxes nor does it increase taxes. It relates
entirely to the method and time of payment.
Petitioner protests that the refund remedy does not make the
CWT less burdensome because taxpayers have to wait years
and may even resort to litigation before they are granted a
refund. 81 This argument is misleading. The practical problems
encountered in claiming a tax refund do not affect the
constitutionality and validity of the CWT as a method of
collecting the tax.
The taxing power has the authority to make reasonable
classifications for purposes of taxation. Inequalities which result
from a singling out of one particular class for taxation, or
exemption, infringe no constitutional limitation. The real estate
industry is, by itself, a class and can be validly treated
differently from other business enterprises.
Petitioner, in insisting that its industry should be treated
similarly as manufacturing enterprises, fails to realize that what
distinguishes the real estate business from other manufacturing
enterprises, for purposes of the imposition of the CWT, is not
their production processes but the prices of their goods sold and
the number of transactions involved. The income from the sale
of a real property is bigger and its frequency of transaction
limited, making it less cumbersome for the parties to comply
with the withholding tax scheme.
On the other hand, each manufacturing enterprise may have
tens of thousands of transactions with several thousand
customers every month involving both minimal and substantial
amounts. To require the customers of manufacturing
enterprises, at present, to withhold the taxes on each of their
transactions with their tens or hundreds of suppliers may result
in an inefficient and unmanageable system of taxation and may
well defeat the purpose of the withholding tax system.
WHEREFORE, the petition is hereby DISMISSED.
PKSMMN, et al., v. Executive Secretary
2
Facts:
In 1971, RA 6260 was enacted which established a Coconut
Investment Fund (CI Fund) for the development of the coconut
industry through capital financing. The use of the fund was
expanded in 1973 to include the stabilization of the domestic
market for coconut-based consumer goods and in 1974 to divert
part of the funds for obtaining direct benefit to coconut farmers.
After five years or in 1976, however, P.D. 961 declared the coco-
levy funds private property of the farmers. P.D. 1468 reiterated
this declaration in 1978. But neither presidential decree actually
turned over possession or control of the funds to the farmers in
their private capacity. The government continued to wield
undiminished authority over the management and disposition of
those funds.
ISSUE:
Whether or not the declaration of coco-levy funds private
properties of the farmers is valid.
HELD:
No. The Court has also recently declared that the coco-levy
funds are in the nature of taxes and can only be used for public
purpose. Taxes are enforced proportional contributions from
persons and property, levied by the State by virtue of its
sovereignty for the support of the government and for all its
public needs. Here, the coco-levy funds were imposed pursuant
to law, namely, R.A. 6260 and P.D. 276. The funds were collected
and managed by the PCA, an independent government
corporation directly under the President. And, as the respondent
public officials pointed out, the pertinent laws used the term
levy, which means to tax, in describing the exaction.
Section 2 of P.D. 755, Article III, Section 5 of P.D. 961, and Article
III, Section 5 of P.D. 1468 completely ignore the fact that coco-
levy funds are public funds raised through taxation. And since
taxes could be exacted only for a public purpose, they cannot be
declared private properties of individuals although such
individuals fall within a distinct group of persons.
The Court of course grants that there is no hard-and-fast rule for
determining what constitutes public purpose. It is an elastic
concept that could be made to fit into modern standards. Public
purpose, for instance, is no longer restricted to traditional
government functions like building roads and school houses or
safeguarding public health and safety. Public purpose has been
construed as including the promotion of social justice. Thus,
public funds may be used for relocating illegal settlers, building
low-cost housing for them, and financing both urban and
agrarian reforms that benefit certain poor individuals. Still, these
uses relieve volatile iniquities in society and, therefore, impact
on public order and welfare as a whole.
Southern Cross vs. CMAP
Cement is hardly an exciting subject for litigation. Still, the
parties in this case have done their best to put up a spirited
advocacy of their respective positions, throwing in everything
including the proverbial kitchen sink. At present, the burden of
passion, if not proof, has shifted to public respondents
Department of Trade and Industry (DTI) and private respondent
Philippine Cement Manufacturers Corporation (Philcemcor),[1]
who now seek reconsideration of our Decision dated 8 July 2004
(Decision), which granted the petition of petitioner Southern
Cross Cement Corporation (Southern Cross).
This case, of course, is ultimately not just about cement. For
respondents, it is about love of country and the future of the
domestic industry in the face of foreign competition. For this
Court, it is about elementary statutory construction,
constitutional limitations on the executive power to impose
tariffs and similar measures, and obedience to the law. Just as
much was asserted in the Decision, and the same holds true
with this present Resolution.
POWER OF PRESIDENT TO IMPOSE TARIFF RATES: Without
Section 28(2), Article VI, the executive branch has no authority
to impose tariffs and other similar tax levies involving the
importation of foreign goods. Assuming that Section 28(2)
Article VI did not exist, the enactment of the SMA by Congress
would be voided on the ground that it would constitute an undue
delegation of the legislative power to tax. The constitutional
provision shields such delegation from constitutional infirmity,
and should be recognized as an exceptional grant of legislative
power to the President, rather than the affirmation of an
inherent executive power.
QUALIFIERS: This being the case, the qualifiers mandated by the
Constitution on this presidential authority attain primordial
consideration: (1) there must be a law; (2) there must be
specified limits; and (3) Congress may impose limitations and
restrictions on this presidential authority.
POWER EXERCISED BY ALTER EGOS OF PRES: The Court
recognizes that the authority delegated to the President under
Section 28(2), Article VI may be exercised, in accordance with
legislative sanction, by the alter egos of the President, such as
department secretaries. Indeed, for purposes of the Presidents
exercise of power to impose tariffs under Article VI, Section
28(2), it is generally the Secretary of Finance who acts as alter
ego of the President. The SMA provides an exceptional instance
wherein it is the DTI or Agriculture Secretary who is tasked by
Congress, in their capacities as alter egos of the President, to
impose such measures. Certainly, the DTI Secretary has no
inherent power, even as alter ego of the President, to levy tariffs
and imports.
TARIFF COMMISSION AND DTI SEC ARE AGENTS: Concurrently,
the tasking of the Tariff Commission under the SMA should be
likewise construed within the same context as part and parcel of
the legislative delegation of its inherent power to impose tariffs
and imposts to the executive branch, subject to limitations and
restrictions. In that regard, both the Tariff Commission and the
DTI Secretary may be regarded as agents of Congress within
their limited respective spheres, as ordained in the SMA, in the
implementation of the said law which significantly draws its
strength from the plenary legislative power of taxation. Indeed,
even the President may be considered as an agent of Congress
for the purpose of imposing safeguard measures. It is Congress,
not the President, which possesses inherent powers to impose
tariffs and imposts. Without legislative authorization through
statute, the President has no power, authority or right to impose
such safeguard measures because taxation is inherently
legislative, not executive.
When Congress tasks the President or his/her alter egos to
impose safeguard measures under the delineated conditions,
the President or the alter egos may be properly deemed as
agents of Congress to perform an act that inherently belongs as
a matter of right to the legislature. It is basic agency law that
the agent may not act beyond the specifically delegated powers
or disregard the restrictions imposed by the principal. In short,
Congress may establish the procedural framework under which
such safeguard measures may be imposed, and assign the
various offices in the government bureaucracy respective tasks
pursuant to the imposition of such measures, the task
assignment including the factual determination of whether the
necessary conditions exists to warrant such impositions. Under
the SMA, Congress assigned the DTI Secretary and the Tariff
Commission their respective functions in the legislatures
scheme of things.
There is only one viable ground for challenging the legality of
the limitations and restrictions imposed by Congress under
Section 28(2) Article VI, and that is such limitations and
restrictions are themselves violative of the Constitution. Thus,
no matter how distasteful or noxious these limitations and
restrictions may seem, the Court has no choice but to uphold
their validity unless their constitutional infirmity can be
demonstrated.
What are these limitations and restrictions that are material to
the present case? The entire SMA provides for a limited
framework under which the President, through the DTI and
Agriculture Secretaries, may impose safeguard measures in the
form of tariffs and similar imposts.
POWER BELONGS TO CONGRESS: the cited passage from Fr.
Bernas actually states, Since the Constitution has given the
President the power of control, with all its awesome implications,
it is the Constitution alone which can curtail such power. Does
the President have such tariff powers under the Constitution in
the first place which may be curtailed by the executive power of
control? At the risk of redundancy, we quote Section 28(2),
Article VI: The Congress may, by law, authorize the President to
fix within specified limits, and subject to such limitations and
restrictions as it may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other duties or imposts
3
within the framework of the national development program of
the Government. Clearly the power to impose tariffs belongs to
Congress and not to the President.
COMMISSIONER OF IR VS CENTRAL LUZON DRUG CORP
GR 148512 June 26, 2006
FACTS:
Central Luzon Drug Corporation is a retailer of medicines and other
pharmaceutical products. For the period January 1995 to December 1995,
pursuant to the mandate of Section 4(a) of Republic Act No. 7432, otherwise
known as the Senior Citizens Act, it granted a twenty percent (20%) discount
on the sale of medicines to qualified senior citizens amounting to P219,778.00.
It then deducted the same amount from its gross income for the taxable year
1995, pursuant to Revenue Regulations No. 2-94 implementing the Senior
Citizens Act, which states that the discount given to senior citizens shall be
deducted by the establishment from its gross sales for value-added tax and
other percentage tax purposes. For the said taxable period, Central Luzon
Drug reported a net loss of P20,963.00 in its corporate income tax return, thus,
it did not pay income tax for 1995.
Subsequently, Central Luzon Drug filed a claim for refund in the amount of
P150,193.00, claiming that according to Sec. 4(a) of the Senior Citizens Act, the
amount of P219,778.00 should be applied as a tax credit. The Commissioner
of Internal Revenue (CIR) was not able to decide the claim on time, hence,
Central Luzon Drug filed a Petition for Review with the Court of Tax Appeals.
The latter dismissed the petition, declaring that even if the law treats the 20%
discount granted to senior citizens as a tax credit, the same cannot apply
when there is no tax liability or the amount of the tax credit is greater than the
tax due. In the latter case, the tax credit will only be to the extent of the tax
liability. Also, no refund can be granted as no tax was erroneously, illegally and
actually collected. Furthermore, the law does not state that a refund can be
claimed by the establishment concerned as
an alternative to the tax credit.
Central Luzon Drug filed a Petition for Review with the Court of Appeals. The
appellate court held that the 20% discount given to senior citizens which is
treated as a tax credit is considered just compensation and, as such, may be
carried over to the next taxable period if there is no current tax liability.
ISSUE:
Whether or not the 20% discount granted by Central Luzon Drug
to qualified senior citizens
pursuant to Sec. 4(a) of the Senior Citizens Act may be claimed
as a tax credit or as a deduction from gross sales in accordance
with Sec. 2(1) of Revenue Regulations No. 2-94
RULING:
The Petition is DENIED.
Sec. 4(a) of the Senior Citizens Act provides:
Sec. 4. Privileges for the Senior Citizens. The
senior citizens shall be
entitled to the following:
(a) the grant of twenty percent (20%) discount
from all establishments
relative to utilization of transportations
services, hotels and similar
lodging establishments, restaurants and
recreation centers and purchase
of medicines anywhere in the country:
Provided, That private
establishments may claim the cost as tax
credit.
The above provision explicitly employed the term tax credit.
Nothing in the provision
suggests for it to mean a deduction from gross sales. Thus,
the 20% discount required by the law to be given to senior
citizens is a tax credit, not a deduction from the gross sales of
the establishment concerned. As a corollary to this, the
definition of tax credit found in Sect. 2(1) of Revenue
Regulations No. 2-94 is erroneous as it refers to tax credit as the
amount representing the 20% discount that shall be deducted
by the said establishment from their gross sales for value added
tax and other percentage tax purposes. When the law says that
the cost of the discount may be claimed as a tax credit, it means
that the amount, when claimed, shall be treated as a reduction
from any tax liability. The law cannot be amended by a mere
regulation.
Finally, for purposes of clarity, Sec. 229 of the Tax Code does not
apply to cases that fall under Sec. 4 of the Senior Citizens Act
because the former provision governs exclusively all kinds of
refund or credit of internal revenue taxes that were erroneously
or illegally imposed and collected pursuant to the Tax Code
while the latter extends the tax credit benefit to the private
establishments concerned even before tax payments have been
made. The tax credit that is contemplated under the Senior
Citizens Act is a form of just compensation, not a remedy for
taxes that were erroneously or illegally assessed and collected.
In the same vein, prior payment of any tax liability is not a
precondition before a taxable entity can benefit from the tax
credit. The credit may be availed of upon payment of the tax
due, if any. Where there is no tax liability or where a private
establishment reports a net loss for the period, the tax credit
can be availed of and carried over to the next taxable year.
CIR vs. Rosemarie Acosta
9. G.R. No. 154068 August 3, 2007
FACTS:
Acosta is an employee of Intel and was assigned in a foreign
country. During that period Intel withheld the taxes due and remitted them to
BIR. Respondent claimed overpayment of taxes and filed petition for review with
CTA. CTA dismissed the petition for failure to file a written claim for
refund with the CIR a condition precedent to the filing of a
petition for review with the CTA. CA reversed the decision
reasoning that Acostas filing of an amended return indicating an
overpayment was sufficient compliance with
the requirement of a written claim.
ISSUE:
Whether or not CTA has jurisdiction to take cognizance of
respondents petition for review.
RULING:
A party seeking an administrative rimedy must not merely
initiate the prescribed administrative procedure to obtain relie but also to
pursue it to its appropriate conclusion before seeking judicial intervention in order to
give administrative agency an opportunity to decide the matter itself correctly and
prevent unnecessary and premature resort to court action. At the time respondent
filed her amended return, the 1997, NIRC was not
yet in effect, hence respondent had no reason to think that the filing of an amended
return would constitute the written claim required by law.
CTA likewise stressed that even the date of filing of the Final Adjustment return was
omitted, inadvertently or otherwise, by respondent in her petition for review. This is
fatal to respondents claim, for it deprived the CTA of its
jurisdiction over the subject matter of the case.
Finally, revenue statutes are substantive laws and in no sense must with that of
remedial laws. Revenue laws are not intended to be liberally constructed
CIR vs. Solidbank
Facts:
Solidbank filed its Quarterly Percentage Tax Returns reflecting
gross receipts amounting to P1,474,693.44. It alleged that the
total included P350,807,875.15 representing gross receipts from
passive income which was already subjected to 20%final
withholding tax (FWT).
The Court of Tax Appeals (CTA) held in Asian Ban Corp. v
Commissioner, that the 20% FWT should not form part of its
taxable gross receipts for purposes of computing the tax.
Solidbank, relying on the strength of this decision, filed with the
BIR a letter-request for the refund or tax credit. It also filed a
petition for review with the CTA where the it ordered the refund.
The CA ruling, however, stated that the 20% FWT did not form
part of the taxable gross receipts because the FWT was not
actually received by the bank but was directly remitted to the
government.
The Commissioner claims that although the FWT was not
actually received by Solidbank, the fact that the amount
redounded to the banks benefit makes it part of the taxable
gross receipts in computing the Gross Receipts Tax. Solidbank
says the CA ruling is correct.
Issue:
Whether or not the FWT forms part of the gross receipts tax.
Held:
Yes. In a withholding tax system, the payee is the taxpayer, the
person on whom the tax is imposed. The payor, a separate
entity, acts as no more than an agent of the government for the
collection of tax in order to ensure its payment. This amount
that is used to settle the tax liability is sourced from the
proceeds constitutive of the tax base.
These proceeds are either actual or constructive. Both parties
agree that there is no actual receipt by the bank. What needs to
be determined is if there is constructive receipt. Since the payee
is the real taxpayer, the rule on constructive receipt can be
rationalized.
4
The Court applied provisions of the Civil Code on actual and
constructive possession. Article 531 of the Civil Code clearly
provides that the acquisition of the right of possession is
through the proper acts and legal formalities established. The
withholding process is one such act. There may not
be actual receipt of the income withheld; however, as provided
for in Article 532, possession by any person without any power
shall be considered as acquired when ratified by the person in
whose name the act of possession is executed.
In our withholding tax system, possession is acquired by the
payor as the withholding agent of the government, because the
taxpayer ratifies the very act of possession for the government.
There is thus constructive receipt.
The processes of bookkeeping and accounting for interest on
deposits and yield on deposit substitutes that are subjected to
FWT are tantamount to delivery, receipt or remittance. Besides,
Solidbank admits that its income is subjected to a tax burden
immediately upon receipt, although it claims that it derives no
pecuniary benefit or advantage through the withholding process.
There being constructive receipt, part of which is withheld, that
income is included as part of the tax base on which the gross
receipts tax is imposed.
CIR vs. SC Johnson
Respondent, JOHNSON AND SON, INC a domestic corporation
organized and operating under the
Philippine laws, entered into a license agreement with SC
Johnson and Son, United States of America
(USA), a non-resident foreign corporation based in the U.S.A.
pursuant to which the [respondent] was
granted the right to use the trademark, patents and technology
owned by the latter including the right
to manufacture, package and distribute the products covered by
the Agreement and secure assistance in
management, marketing and production from SC Johnson and
Son, U. S. A.
The said License Agreement was duly registered with the
Technology Transfer Board of the Bureau of
Patents, Trade Marks and Technology Transfer under Certificate
of Registration No. 8064 . For the use of
the trademark or technology, SC JOHNSON AND SON, INC was
obliged to pay SC Johnson and Son, USA
royalties based on a percentage of net sales and subjected the
same to 25% withholding tax on royalty
payments which respondent paid for the period covering July
1992 to May 1993.00 On October 29,
1993, SC JOHNSON AND SON, USA filed with the International
Tax Affairs Division (ITAD) of the BIR a
claim for refund of overpaid withholding tax on royalties arguing
that, since the agreement was
approved by the Technology Transfer Board, the preferential tax
rate of 10% should apply to the
respondent. Respondent submits that royalties paid to SC
Johnson and Son, USA is only subject to 10%
withholding tax pursuant to the most-favored nation clause of
the RP-US Tax Treaty in relation to the
RP-West Germany Tax Treaty. The Internal Tax Affairs Division of
the BIR ruled against SC Johnson and
Son, Inc. and an appeal was filed by the former to the Court of
tax appeals.
The CTA ruled against CIR and ordered that a tax credit be
issued in favor of SC Johnson and Son, Inc.
Unpleased with the decision, the CIR filed an appeal to the CA
which subsequently affirmed in toto the
decision of the CTA. Hence, an appeal on certiorari was filed to
the SC.
THE MAIN ISSUE:
WON SC JOHNSON AND SON,USA IS ENTITLED TO THE
MOST FAVORED NATION TAX RATE OF 10% ON ROYALTIES
AS PROVIDED IN THE RP-US TAX TREATY IN RELATION TO
THE RP-WEST GERMANY TAX TREATY.
The concessional tax rate of 10 percent provided for in the RP-
Germany Tax Treaty could not apply to
taxes imposed upon royalties in the RP-US Tax Treaty since the
two taxes imposed under the two tax
treaties are not paid under similar circumstances, they are not
containing similar provisions on tax
crediting.
The United States is the state of residence since the taxpayer, S.
C. Johnson and Son, U. S. A., is based
there. Under the RP-US Tax Treaty, the state of residence and
the state of source are both permitted to
tax the royalties, with a restraint on the tax that may be
collected by the state of source. Furthermore,
the method employed to give relief from double taxation is the
allowance of a tax credit to citizens or
residents of the United States against the United States tax, but
such amount shall not exceed the
limitations provided by United States law for the taxable year.
The Philippines may impose one of three
rates- 25 percent of the gross amount of the royalties; 15
percent when the royalties are paid by a
corporation registered with the Philippine Board of Investments
and engaged in preferred areas of
activities; or the lowest rate of Philippine tax that may be
imposed on royalties of the same kind paid
under similar circumstances to a resident of a third state
CIR vs. Estate of Benigno
C a s e : C O M M I SS I O N E R O F I N T E R N A L R E V E N U E v.
T H E E S TAT E O F B E N I G N O P. T O D A , J R . ,
Represented by Special Co-
administrators Lorna Kapunan and Mario Luza Bautista
(G.R. No. 147188)
Date: September 14, 2004
Ponente: DAVIDE, JR.,
C.J
.
FACTS:
Cibeles Insurance Corporation (CIC) authorized
B e n i g n o P. To d a , J r. , Pr e s i d e n t a n d o w n e r o f
99.991% of its issued and
outstanding capital stock, to sell the Cibeles Building and the
two parcels of land on which the building stands for an amount
of not less than P90 million. Toda purportedly sold the property
to Rafael A. Altonaga, who, in turn, sold the same property on
the same day to Royal Match Inc. (RMI). For the sale of the
property to RMI, Altonaga paid capital gains tax in the amount of
P10 million.CIC filed its c o r p o r a t e a n n u a l i n c o m e t a x
retu rn for the year 1989, declaring, among other
things, i ts gain from the sale of rea l property in the
a m o u n t o f P 7 5 , 7 2 8 . 0 2 1 . To d a t h e n s o l d h i s e n t i r e
s h a r e s o f s t o c k s i n C I C t o L e H u n T. C h o a , a s
e v i d e n c e d b y a D e e d o f S a l e o f Shares of Stocks. Three
and a half years later Toda died.
The Bureau of Internal Revenue (BIR) sent an assessment notice
and demand letter to the CIC for deficiency income tax for the
year 1989. The new CIC asked for a reconsideration, asserting
that the assessment should be directed against the old CIC, and
not against t h e n e w C I C , w h i c h i s o w n e d b y a n
e n t i r e l y d i ff e r e n t s e t o f s t o c k h o l d e r s ; m o r e o v e r ,
To d a h a d u n d e r t a ke n t o h o l d t h e b u y e r o f h i s
stockholdings and the CIC free from all tax liabilities for the
fiscal years 1987-1989. The Estate of Benigno P. Toda, Jr.,
represented by special co-administrators Lorna Kapunan and
Mario Luza Bautista, received a Notice of Assessment from the
Commissioner of Internal Revenue for deficiency income tax for
the year 1989.
The Estate thereafter filed a letter of protest. The Commissioner
dismissed the protest, stating that a fraudulent scheme was
deliberately perpetuated by the CIC wholly owned and
controlled by Toda by covering up the additional gain of P100
million, which r e s u l t e d i n t h e c h a n g e i n t h e i n c o m e
structure of the proceeds of the sale of the two
parcels of land and the building thereon to an
individual capital gains, thus evading the higher corporate
income tax rate of 35%. The Estate filed a petition for review
with the CTA alleging that the Commissioner erred in holding the
Estate liable for income tax deficiency. In its decision, the CTA
held that the Commissioner failed to prove that CIC committed
fraud to deprive the government of the taxes due it. It ruled that
even assuming that a pre-conceived scheme was adopted by
CIC, the same constituted mere tax avoidance, and not tax
evasion. Hence, the CTA declared that the Estate is not liable for
deficiency income tax and, accordingly, cancelled and set aside
the assessment issued by the Commissioner. Court of Appeals
affirmed the decision of the CTA.
ISSUE:
WON respondent Estate is liable for the 1989 deficiency income
tax of Cibeles Insurance Corporation.
HELD:
Yes.
RATIO:
A corporation has a juridical personality distinct and separate
from the persons owning or composing it. Thus, the owners or
stockholders of a corporation may not generally be
made to answer for the liabilities of a corporation
and vice versa. There are, however , certain
instances in which personal liability may arise. It
5
has been held in a number of cases that personal
l i a b i l i t y o f a corporate director, trustee, or officer along,
albeit not necessarily, with the corporation may validly attach
when:
1. He assents to the (a) patently unlawful act of the corporation,
(b) bad faith or gross negligence in directing its affairs, or (c)
conflict of interest, resulting in damages to the corporation, its
stockholders, or other persons;
2. He consents to the issuance of watered down
stocks or, having knowl edge thereo f, does not
f o r t h w i t h fi l e w i t h t h e
corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with
the corporation; or
4. He is made, by specific provision of law, to personally answer
for his corporate action
It is worth noting that when the late Toda sold his shares of stock
to Le Hun T. Choa, he knowingly and voluntarily held himself
personally liable for all the tax liabilities of CIC and the buyer for
the years 1987, 1988, and 1989. Paragraph g of the Deed of
Sale of Shares of Stocks specifically provides:
xxx
SELLER undertakes and agrees to hold the BUYER and
Cibeles free from any and all income tax liabilities of
Cibeles for
the fiscal years 1987, 1988 and 1989.
When the late Toda undertook and agreed to hold the BUYER
and Cibeles free from any all income tax liabilities of Cibeles for
t h e fi s c a l y e a r s 1 9 8 7 , 1 9 8 8 , a n d 1 9 8 9 , h e t h e r e b y
v o l u n t a r i l y h e l d h i m s e l f p e r s o n a l l y l i a b l e t h e r e f o r.
Re s p o n d e n t e s t a t e c a n n o t , therefore, deny liability for
CICs deficiency income tax for the year 1989 by invoking the
separate corporate personality of CIC, since its obligation arose
from Todas contractual undertaking, as contained in the Deed of
Sale of Shares of Stock.
The decision of the Court of Appeals
is reversed and respondent Estate of
B e n i g n o P . T o d a J r . w a s o r d e r e d t o pay
P79,099,999.22 as deficiency income tax of Cibeles Insurance
Corporation for the year 1989.
Commissioner of Internal Revenue v. Philippine American
Accident Insurance Company, Inc., The Philippine
American Assurance Company, Inc., and the Philippine
American General Insurance Co., Inc.
Facts:
Respondent Insurance Companies (Respondents) paid under
protest from August 1971 to September 1972 the Bureau of
Internal Revenue the 3% tax imposed on lending investors by
Section 195-A of Commonwealth Act No. 466 (CA 466), the
National Internal Revenue Code applicable at the time.
On 31 January 1973, Respondents sent a letter-claim to herein
petitioner (CIR) seeking refund of the taxes paid, which letter-
claim was unanswered, thus the filing of petitions before the
CTA. Eventually, the issue reached the Supreme Court.
Issue:
Whether or not Respondents are subject to the 3% Percentage
Tax as lending investors under CA 466.
(a) SC is asked to rule on whether or not the tax refund
granted to Insurance Companies are tax exemptions
and as such, cannot be allowed unless granted
explicitly and categorically;
(b) CIR likewise contends that the definition of lending
investors under CA 466 is broad enough to encompass
insurance companies;
(c) CIR finally contends that Congress intended to tax
twice insurance companies
Ruling:
(a) Interpretation of tax laws; tax exemption
SC: The rule that tax exemptions should be construed strictly
against the taxpayer presupposes that the taxpayer is clearly
subject to the tax being levied against him. Unless a statute
imposes a tax clearly, expressly and unambiguously, what
applies is the equally well-settled rule that the imposition of a
tax cannot be presumed. Where there is doubt, tax laws
must be construed strictly against the government and
in favor of the taxpayer.
(b) Definition of Lending Investors
SC: Plainly, insurance companies and lending investors are
different enterprises in the eyes of the law. Lending investors
cannot, for a consideration, hold anyone harmless from loss,
damage or liability, nor provide compensation or indemnity for
loss. The underwriting of risks is the prerogative of insurers, the
great majority of which are incorporated insurance companies
like Respondents.
True, respondents granted mortgage and other kinds of loans.
However, this was not done independently of respondents
insurance business. The granting of certain loans is one of
several means of investment allowed to insurance companies.
The CTA and the Court of Appeals found that the investment of
premiums and other funds received by Respondents through
the granting of mortgage and other loans was necessary to
Respondents business and hence, should not be taxed
separately.
Insurance companies are required by law to possess and
maintain substantial legal reserves to meet their obligations to
policyholders. As such, the creation of "investment income" has
long been held to be generally, if not necessarily, essential to
the business of insurance.
The Court has also held that when a company is taxed on its
main business, it is no longer taxable further for engaging in an
activity or work which is merely a part of, incidental to and is
necessary to its main business.
Sections 195-A and 182(A)(3)(dd) of CA 466 do not require
insurance companies to pay double percentage and fixed taxes.
They merely tax lending investors, not lending activities.
(c) Different Tax Treatment of Insurance Companies and
Lending Investors
Section 182(A)(3) of CA 466 accorded different tax treatments to
lending investors and insurance companies. The relevant
portions of Section 182 state:
Sec. 182. Fixed taxes. (A) On business xxx
(3) Other fixed taxes. The following fixed taxes shall
be collected as follows, the amount stated being for the
whole year, when not otherwise specified;
xxx
(dd) Lending investors
1. In chartered cities and first class
municipalities, five hundred pesos;
2. In second and third class municipalities, two
hundred and fifty pesos;
3. In fourth and fifth class municipalities and
municipal districts, one hundred and twenty-
five pesos; Provided, That lending investors
who do business as such in more than one
province shall pay a tax of five hundred pesos.
xxx
(gg) Banks, insurance companies, finance and
investment companies doing business in the Philippines
and franchise grantees, five hundred pesos.
xxx (Emphasis supplied.)
The separate provisions on lending investors and insurance
companies demonstrate an intention to treat these businesses
differently. If Congress intended insurance companies to be
taxed as lending investors, there would be no need for Section
182(A)(3)(gg). Section 182(A)(3)(dd) would have been sufficient.
That insurance companies were included with banks, finance
and investment companies also supports the CTAs conclusion
that insurance companies had more in common with the latter
enterprises than with lending investors. As the CTA pointed out,
banks also regularly lend money at interest, but are not taxable
as lending investors.
We find no merit in petitioners contention that Congress
intended to subject respondents to two percentage taxes and
two fixed taxes. Petitioners argument goes against the
doctrine of strict interpretation of tax impositions.
6
WHEREFORE, we DENY the instant petition and AFFIRM the
Decision of 7 January 2000 of the Court of Appeals in CA-G.R. SP
No. 36816.
SO ORDERED.
PAGCOR vs. BIR:
Facts:
With the passage of Republic Act No. (RA) 9337, the Philippine
Amusement and Gaming Corporation (PAGCOR) has been
excluded from the list of government-owned and controlled
corporations (GOCCs) that are exempt from tax under
Section27(c) of the Tax Code; PAGCOR is now subject to
corporate income tax. The Supreme Court (SC) held that the
omission of PAGCOR from the list of tax-exempt GOCCs by
RA 9337 does not violate the right to equal protection of the
laws under Section 1, Article III of the Constitution,
because PAGCORs exemption from payment of corporate
income tax was not based on classification showing substantial
distinctions; rather, it was granted upon the corporations
own request to be exempted from corporate income tax.
Legislative records likewise reveal that the legislative intention
is to require PAGCOR to pay corporate income tax.
With regard to the issue that the removal of PAGCOR from the
exempted list violates the non-impairment clause contained in
Section 10, Article III of the Constitution which provides that
no law impairing the obligation of contracts shall be passed
the SC explained that following its previous ruling in the case
of Manila Electric Company v. Province of Laguna 366 Phil.
428(1999), this does not apply. Franchises such as that granted
to PAGCOR partake of the nature of a grant, and is thus beyond
the purview of the non-impairment clause of the Constitution.
ISSUE:
W/N PAGCOR IS EXEMPTED FROM VAT. YES
RULING:
As regards the liability of PAGCOR to VAT, the SC finds Section
4.108-3 of Revenue Regulations No.(RR) 16-2005, which
subjects PAGCOR and its licensees and franchisees to VAT, null
and void for being contrary to the National Internal Revenue
Code (NIRC), as amended by RA 9337. According to the SC, RA
9337 does not contain any provision that subjects PAGCOR
to VAT. Instead, the SC finds support to the VAT exemption of
PAGCOR under Section 109(k) of the Tax Code, which provides
that transactions exempt under international agreements to
which the Philippines is a signatory or under special laws
[except Presidential Decree No. (PD) 529] are exempt from VAT.
Considering that PAGCORs charter, i.e., PD1869 which grants
PAGCOR exemption from taxes is a special law, it is exempt
from payment of VAT. Accordingly, the SC held that the BIR
exceeded its authority in subjecting PAGCOR to VAT, and thus
declared RR 16-05 null and void insofar as it subjects PAGCOR
to VAT for being contrary to the NIRC, as amended by RA
9337.
PAGCOR is subject to income tax but remains exempt
from the imposition of value-added tax. With the
amendment by R.A. No. 9337 of Section 27 (c)
of the National Internal Revenue Code of 1997 by omitting
PAGCOR from the list of government corporations exempt for
income tax, the legislative intent is to require PAGCOR to pay
corporate income tax. However, nowhere in R.A. No. 9337 is it
provided that PAGCOR can be subjected to VAT. Thus, the
provision of RR No. 16-2005, which the respondent BIR issued
to implement the VAT law, subjecting PAGCOR to 10% VAT is
invalid for being contrary to R.A. No. 9337.
COMMISSIONER OF INTERNAL REVENUE, vs.ST. LUKE'S
MEDICAL CENTER,
FACTS:
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized
as a non-stock and non-profit corporation. On 16 December
2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's
deficiency taxes amounting toP76,063,116.06 for 1998,
comprised of deficiency income tax, value-added tax,
withholding tax on compensation and expanded withholding tax.
The BIR reduced the amount to P63,935,351.57 during trial in
the First Division of the CTA. 4
The BIR argued before the CTA that Section 27(B) of the NIRC,
which imposes a 10% preferential tax rate on the income of
proprietary non-profit hospitals, should be applicable to St.
Luke's. According to the BIR, Section 27(B), introduced in 1997,
"is a new provision intended to amend the exemption on non-
profit hospitals that were previously categorized as non-stock,
non-profit corporations under Section 26 of the 1997 Tax Code x
x x." The BIR claimed that St. Luke's was actually operating for
profit in 1998 because only 13% of its revenues came from
charitable purposes. St. Luke's had total revenues
of P1,730,367,965 or approximately P1.73 billion from patient
services in 1998.
ISSUE:
WON St. Luke's is liable for deficiency income tax in 1998 under
Section 27(B) of the NIRC, which imposes a preferential tax rate
of 10% on the income of proprietary non-profit hospitals.
RULING.
We hold that Section 27(B) of the NIRC does not remove the
income tax exemption of proprietary non-profit hospitals under
Section 30(E) and (G). Section 27(B) on one hand, and Section
30(E) and (G) on the other hand, can be construed together
without the removal of such tax exemption. The effect of the
introduction of Section 27(B) is to subject the taxable income of
two specific institutions, namely, proprietary non-profit
educational institutions 36 and proprietary non-profit hospitals,
among the institutions covered by Section 30, to the 10%
preferential rate under Section 27(B) instead of the ordinary
30% corporate rate under the last paragraph of Section 30 in
relation to Section 27(A)(1).
Section 27(B) of the NIRC imposes a 10% preferential tax rate on
the income of (1) proprietary non-profit educational institutions
and (2) proprietary non-profit hospitals. The only qualifications
for hospitals are that they must be proprietary and non-profit.
"Proprietary" means private, following the definition of a
"proprietary educational institution" as "any private school
maintained and administered by private individuals or groups"
with a government permit. "Non-profit" means no net income or
asset accrues to or benefits any member or specific person, with
all the net income or asset devoted to the institution's purposes
and all its activities conducted not for profit.
"Non-profit" does not necessarily mean "charitable." The Court
defined "charity" in Lung Center of the Philippines v. Quezon
City 40 as "a gift, to be applied consistently with existing laws, for
the benefit of an indefinite number of persons, either by
bringing their minds and hearts under the influence of education
or religion, by assisting them to establish themselves in life or
[by] otherwise lessening the burden of government." To be a
charitable institution, however, an organization must meet the
substantive test of charity in Lung Center. Charity is essentially
a gift to an indefinite number of persons which lessens the
burden of government. In other words, charitable institutions
provide for free goods and services to the public which would
otherwise fall on the shoulders of government. Thus, as a matter
of efficiency, the government forgoes taxes which should have
been spent to address public needs, because certain private
entities already assume a part of the burden. This is the
rationale for the tax exemption of charitable institutions. The
loss of taxes by the government is compensated by its relief
from doing public works which would have been funded by
appropriations from the Treasury.
Charitable institutions, however, are not ipso facto entitled to a
tax exemption. As a general principle, a charitable institution
does not lose its character as such and its exemption from taxes
7
simply because it derives income from paying patients, whether
out-patient, or confined in the hospital, or receives subsidies
from the government, so long as the money received is devoted
or used altogether to the charitable object which it is intended
to achieve; and no money inures to the private benefit of the
persons managing or operating the institution. 47
The operations of the charitable institution generally refer to its
regular activities. Section 30(E) of the NIRC requires that these
operations be exclusive to charity. There is also a specific
requirement that "no part of [the] net income or asset shall
belong to or inure to the benefit of any member, organizer,
officer or any specific person." The use of lands, buildings and
improvements of the institution is but a part of its operations.
There is no dispute that St. Luke's is organized as a non-stock
and non-profit charitable institution. However, this does not
automatically exempt St. Luke's from paying taxes. This only
refers to the organization of St. Luke's. Even if St. Luke's meets
the test of charity, a charitable institution is not ipso facto tax
exempt. To be exempt from real property taxes, Section 28(3),
Article VI of the Constitution requires that a charitable institution
use the property "actually, directly and exclusively" for
charitable purposes. To be exempt from income taxes, Section
30(E) of the NIRC requires that a charitable institution must be
"organized and operated exclusively" for charitable purposes.
Likewise, to be exempt from income taxes, Section 30(G) of the
NIRC requires that the institution be "operated exclusively" for
social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies
the words "organized and operated exclusively" by providing
that:
Notwithstanding the provisions in the preceding paragraphs, the
income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or
from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax
imposed under this Code. (Emphasis supplied)
In short, the last paragraph of Section 30 provides that if a tax
exempt charitable institution conducts "any" activity for profit,
such activity is not tax exempt even as its not-for-profit activities
remain tax exempt. This paragraph qualifies the requirements in
Section 30(E) that the "[n]on-stock corporation or association
[must be] organized and operated exclusively for x x x
charitable x x x purposes x x x." It likewise qualifies the
requirement in Section 30(G) that the civic organization must be
"operated exclusively" for the promotion of social welfare.
In 1998, St. Luke's had total revenues of P1,730,367,965 from
services to paying patients. It cannot be disputed that a hospital
which receives approximately P1.73 billion from paying patients
is not an institution "operated exclusively" for charitable
purposes. Clearly, revenues from paying patients are income
received from "activities conducted for profit."
In Lung Center, this Court declared: "[e]xclusive" is defined as
possessed and enjoyed to the exclusion of others; debarred from
participation or enjoyment; and "exclusively" is defined, "in a
manner to exclude; as enjoying a privilege exclusively." x x x
The words "dominant use" or "principal use" cannot be
substituted for the words "used exclusively" without doing
violence to the Constitution and the law. Solely is synonymous
with exclusively.
A tax exemption is effectively a social subsidy granted by the
State because an exempt institution is spared from sharing in
the expenses of government and yet benefits from them. Tax
exemptions for charitable institutions should therefore be limited
to institutions beneficial to the public and those which improve
social welfare. A profit-making entity should not be allowed to
exploit this subsidy to the detriment of the government and
other taxpayers.1wphi1
St. Luke's fails to meet the requirements under Section 30(E)
and (G) of the NIRC to be completely tax exempt from all its
income. However, it remains a proprietary non-profit hospital
under Section 27(B) of the NIRC as long as it does not distribute
any of its profits to its members and such profits are reinvested
pursuant to its corporate purposes. St. Luke's, as a proprietary
non-profit hospital, is entitled to the preferential tax rate of 10%
on its net income from its for-profit activities.
CIR vs. Mitsubishi Metal Corp, Atlas Consolidated Mining
Facts:
Atlas entered into a contract of loan and sale with Mitsubishi
(licensed to do business in the Phils), whereby Mitsubishi agreed
to loan $20M to Atlas for a new concentrator for copper
production, and Atlas to sell copper produced from such
machine for 15 years.
Mitsubishi in turn applied for a loan with the Eport-Import Bank
of Japan (Eximbank) to cover the amount it would loan to Atlas.
Atlas paid interest payments to Mitsubishi pursuant to the loan
totalling P13M, where P1.9M (15%) was automatically withheld
pursuant to Sec. 24 and 53 and duly remitted to the
government.
Atlas and Mitsubishi filed a claim for tax credit for the P1.9M
with the CIR. (Mitsubishi waived its interest in favor of Atlas). CIR
not having acted, petition for review with the CTA. The primary
ground for the claim was that Mitsubishi was a mere agent of
Eximbank and the funds came from the latter. The provision
relied upon was Sec. 29 (b)(7)(A), which excludes from gross
income:
(A) Income received from their investments in the
Philippines in loans, stocks, bonds or other domestic securities,
or from interest on their deposits in banks in the Philippines by
(1) foreign governments, (2) financing institutions owned,
controlled, or enjoying refinancing from them, and (3)
international or regional financing institutions established by
governments.
The CTA ruled in favor of Mitsubishi.
Issue:
Whether or not the interest income from the loans extended to
Atlas by Mitsubishi is excludible from gross income taxation
pursuant to Sec. 29 (b)(7)(A), and therefore exempt from
withholding tax.
Ruling:
The loan and sales contract between Mitsubishi and Atlas does
not reference Eximbank. The contract can only be interpreted as
between them. There is no basis to assert that Mitsubishi was a
mere agent of Eximbank.
Therefore when Mitsubishi obtained a loan from Eximbank, it did
so independently, although the purpose of which was to be used
for the importation of copper from Atlas. As such the Mitsubishi-
Eximbank contract is separate from the Mitsubishi-Atlas
contract.
It is settled that that laws granting tax exemption are construed
strictissimi juris against the taxpayer and liberally in favor of the
taxing power. The burden of proof lies with the party claiming
exemption.
Significantly, private respondents are not even under the
enumeration under Section 29 (b)(7)(A). The tax liability of a
party cannot be glossed over of a supposed "broad, pragmatic
analysis" without substantial supportive evidence. Even the
invocation of comity is not enough (allegation that the Eximbank
funds were governmental) as it would lead to Philippine
corporations dealing with foreign entities, which in turn
negotiate independently with their governments, to avail of tax
exemption.
Kepco v. CIR [G.R. No. 179961 January 31, 2011]
Facts:
8
Kepco is a domestic corporation engaged in the independent
production of of energy. It sells its electricity to NaPoCor, who is
a VAT exempt entity. In 1999, Kepco incurred input VAT
amounting to PhP 10.5 Million on its domestic purchase of goods
and services used in the production and sale of electricity to
Napocor.
Kepco filed an administrative claim for refund on the unutilized
input taxes. The CTA denied Kepcos claim for refund for failure
to substantiate its effectively zero-rated sales during the taxable
year. The CTA held that Kepco failed to comply with the invoicing
requirements. The CTA reasoned that Kepcos failure to comply
with the requirement of imprinting the words zero-rated on its
official receipts resulted in non-entitlement to the benefit of VAT
zero-rating and denial of Kepcos claim for refund of input tax.
Issue:
Whether or not Kepcos failure to imprint the words zero-rated
on its VAT official receipts issued to NPC is fatal to its claim for
refund of unutilized input tax credits.
Held:
Yes. For the effective zero rating of such services, however, the
VAT-registered taxpayer must comply with invoicing
requirements under Sections 113 and 237 of the 1997 NIRC as
implemented by Section 4.108-1 of R.R. No. 7-95, thus:
Sec. 113. Invoicing and Accounting Requirements for
VAT-Registered Persons.
(A) Invoicing Requirements. A VAT-registered person shall, for
every sale, issue an invoice or receipt. In addition to the
information required under Section 237, the following
information shall be indicated in the invoice or receipt:
(1) A statement that the seller is a VAT-registered person,
followed by his taxpayers identification number; and
(2) The total amount which the purchaser pays or is obligated to
pay to the seller with the indication that such amount includes
the value-added tax.
(B) Accounting Requirements. Notwithstanding the provisions
of Section 233, all persons subject to the value-added tax under
Sections 106 and 108 shall, in addition to the regular accounting
records required, maintain a subsidiary sales journal and
subsidiary purchase journal on which the daily sales and
purchases are recorded.1wphi1 The subsidiary journals shall
contain such information as may be required by the Secretary of
Finance.10 (Emphasis supplied)
Sec. 237. Issuance of Receipts or Sales or Commercial
Invoices. All persons subject to an internal revenue tax shall,
for each sale or transfer of merchandise or for services rendered
valued at Twenty-five pesos (P25.00) or more, issue duly
registered receipts or sales or commercial invoices, prepared at
least in duplicate, showing the date of transaction, quantity, unit
cost and description of merchandise or nature of service:
Provided, however, That in the case of sales, receipts or
transfers in the amount of One Hundred Pesos (P100.00) or
more, or regardless of amount, where the sale or transfer is
made by a person liable to value-added tax to another person
also liable to value-added tax; or where the receipt is issued to
cover payment made as rentals, commissions, compensations or
fees, receipts or invoices shall be issued which shall show the
name, business style, if any, and address of the purchaser,
customer or client; Provided, further, That where the purchaser
is a VAT-registered person, in addition to the information herein
required, the invoice or receipt shall further show the Taxpayer
Identification Number (TIN) of the purchaser.
The original of each receipt or invoice shall be issued to the
purchaser, customer or client at the time the transaction is
effected, who, if engaged in business or in the exercise of
profession, shall keep and preserve the same in his place of
business for a period of three (3) years from the close of the
taxable year in which such invoice or receipt was issued, while
the duplicate shall be kept and preserved by the issuer, also in
his place of business, for a like period.
The Commissioner may, in meritorious cases, exempt any
person subject to an internal revenue tax from compliance with
the provisions of this Section.11
Section 4.108-1. Invoicing Requirements. All VAT-
registered persons shall, for every sale or lease of goods or
properties or services, issue duly registered receipts or sales or
commercial invoices which must show:
1. The name, TIN and address of seller;
2. Date of transaction;
3. Quantity, unit cost and description of merchandise or nature
of service;
4. The name, TIN, business style, if any, and address of the VAT-
registered purchaser, customer or client;
5. The word "zero-rated" imprinted on the invoice
covering zero-rated sales;
6. The invoice value or consideration.
In the case of sale of real property subject to VAT and where the
zonal or market value is higher than the actual consideration,
the VAT shall be separately indicated in the invoice or receipt.
Only VAT-registered persons are required to print their
TIN followed by the word "VAT" in their invoices or
receipts and this shall be considered as "VAT Invoice." All
purchases covered by invoices other than "VAT Invoice" shall not
give rise to any input tax.
If the taxable person is also engaged in exempt operations, he
should issue separate invoices or receipts for the taxable and
exempt operations. A "VAT Invoice" shall be issued only for sales
of goods, properties or services subject to VAT imposed in
Sections 100 and 102 of the code.
The invoice or receipt shall be prepared at least in duplicate, the
original to be given to the buyer and the duplicate to be
retained by the seller as part of his accounting records.
(Emphases supplied)
Also, as correctly noted by the CTA En Banc, in Kepcos
approved Application/Certificate for Zero Rate issued by the CIR
on January 19, 1999, the imprinting requirement was likewise
specified, viz:
Valid only for sale of services from Jan. 19, 1999 up to December
31, 1999 unless sooner revoked.
Note: Zero-Rated Sales must be indicated in the
invoice/receipt.12
Indeed, it is the duty of Kepco to comply with the requirements,
including the imprinting of the words "zero-rated" in its VAT
official receipts and invoices in order for its sales of electricity to
NPC to qualify for zero-rating.
It must be emphasized that the requirement of imprinting the
word "zero-rated" on the invoices or receipts under Section
4.108-1 of R.R. No. 7-95 is mandatory as ruled by the CTA En
Banc, citing Tropitek International, Inc. v. Commissioner of
Internal Revenue.13 In Kepco Philippines Corporation v.
Commissioner of Internal Revenue,14the CTA En Banc explained
the rationale behind such requirement in this wise:
The imprinting of "zero-rated" is necessary to distinguish sales
subject to 10% VAT, those that are subject to 0% VAT (zero-
rated) and exempt sales, to enable the Bureau of Internal
Revenue to properly implement and enforce the other provisions
of the 1997 NIRC on VAT, namely:
9
1. Zero-rated sales [Sec. 106(A)(2) and Sec. 108(B)];
2. Exempt transactions [Sec. 109] in relation to Sec. 112(A);
3. Tax Credits [Sec. 110]; and
4. Refunds or tax credits of input tax [Sec. 112]
xxx
Records disclose, as correctly found by the CTA that Kepco failed
to substantiate the claimed zero-rated sales ofP10,514,023.92.
The wordings "zero-rated sales" were not imprinted on the VAT
official receipts presented by Kepco (marked as Exhibits S to S-
11) for taxable year 1999, in clear violation of Section 4.108-1 of
R.R. No. 7-95 and the condition imposed under its approved
Application/Certificate for Zero-rate as well.
Thus, for Kepcos failure to substantiate its effectively zero-rated
sales for the taxable year 1999, the claimedP10,527,202.54
input VAT cannot be refunded.
Regarding Kepcos contention, that non-compliance with the
requirement of invoicing would only subject the non-complying
taxpayer to penalties of fine and imprisonment under Section
264 of the Tax Code, and not to the outright denial of the claim
for tax refund or credit, must likewise fail. Section 264
categorically provides for penalties in case of "Failure or Refusal
to Issue Receipts or Sales or Commercial Invoices, Violations
related to the Printing of such Receipts or Invoices and Other
Violations," but not to penalties for failure to comply with the
requirement of invoicing. As recently held in Kepco Philippines
Corporation v. Commissioner of Internal Revenue, 18 "Section 264
of the 1997 NIRC was not intended to excuse the compliance of
the substantive invoicing requirement needed to justify a claim
for refund on input VAT payments."
The invoicing requirement is reasonable and must be
strictly complied with, as it is the only way to determine
the veracity of its claim. Well-settled in this jurisdiction
is the fact that actions for tax refund, as in this case, are
in the nature of a claim for exemption and the law is
construed in strictissimi juris against the taxpayer. The
pieces of evidence presented entitling a taxpayer to an
exemption are also strictissimi scrutinized and must be
duly proven.23
G.R. No. 179115 September 26, 2012
ASIA INTERNATIONAL AUCTIONEERS, INC., Petitioner, vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
Facts:
AIA is a duly organized corporation operating within the Subic
Special Economic Zone. It is engaged in the importation of used
motor vehicles and heavy equipment which it sells to the public
through auction.4
On August 25, 2004, AIA received from the CIR a Formal Letter
of Demand, dated July 9, 2004, containing an assessment for
deficiency value added tax (VAT) and excise tax.
AIA claimed that it filed a protest letter dated August 29, 2004
through registered mail on August 30, 2004.6 It also submitted
additional supporting documents on September 24, 2004 and
November 22, 2004.7
The CIR failed to act on the protest, prompting AIA to file a
petition for review before the CTA on June 20, 2005,8to which
the CIR filed its Answer on July 26, 2005.9
On March 8, 2006, the CIR filed a motion to dismiss10 on the
ground of lack of jurisdiction citing the alleged failure of AIA to
timely file its protest which thereby rendered the assessment
final and executory. The CIR denied receipt of the protest letter
dated August 29, 2004 claiming that it only received the protest
letter dated September 24, 2004 on September 27, 2004, three
days after the lapse of the 30-day period prescribed in Section
22811 of the Tax Code.12
In opposition to the CIRs motion to dismiss, AIA submitted the
following evidence to prove the filing and the receipt of the
protest letter dated August 29, 2004: (1) the protest letter dated
August 29, 2004 with attached Registry Receipt No. 3824;13 (2)
a Certification dated November 15, 2005 issued by Wilfredo R.
De Guzman, Postman III, of the Philippine Postal Corporation of
Olongapo City, stating that Registered Letter No. 3824 dated
August 30, 2004 , addressed to the CIR, was dispatched under
Bill No. 45 Page 1 Line 11 on September 1, 2004 from Olongapo
City to Quezon City;14 (3) a Certification dated July 5, 2006
issued by Acting Postmaster, Josefina M. Hora, of the Philippine
Postal Corporation-NCR, stating that Registered Letter No. 3824
was delivered to the BIR Records Section and was duly received
by the authorized personnel on September 8, 2004;15 and (4) a
certified photocopy of the Receipt of Important Communication
Delivered issued by the BIR Chief of Records Division, Felisa U.
Arrojado, showing that Registered Letter No. 3824 was received
by the BIR.16 AIA also presented Josefina M. Hora and Felisa U.
Arrojado as witnesses to testify on the due execution and the
contents of the foregoing documents.
On appeal to the Court of Tax Appeals, the CIRs motion to
dismiss was granted, holding that "while a mailed letter is
deemed received by the addressee in the course of the mail,
still, this is merely a disputable presumption, subject to
controversion, and a direct denial of the receipt thereof shifts
the burden upon the party favored by the presumption to prove
that the mailed letter indeed was received by the addressee."18
The CTA First Division faulted AIA for failing to present the
registry return card of the subject protest letter. Moreover, it
noted that the text of the protest letter refers to a Formal
Demand Letter dated June 9, 2004 and not the subject Formal
Demand Letter dated July 9, 2004. Furthermore, it rejected AIAs
argument that the September 24, 2004 letter merely served as
a cover letter to the submission of its supporting documents
pointing out that there was no mention therein of a prior
separate protest letter.
The CTA En Banc affirmed the ruling of the CTA First Division
holding that AIAs evidence was not sufficient to prove receipt
by the CIR of the protest letter dated August 24, 2004.
Hence, the instant petition.
Apparently, , both parties discussed the legal bases for AIAs tax
liability, unmindful of the fact that this case stemmed from the
CTAs dismissal of AIAs petition for review for failure to file a
timely protest, without passing upon the substantive merits of
the case.
Relevantly, on January 30, 2008, AIA filed a Manifestation and
Motion with Leave of the Honorable Court to Defer or Suspend
Further Proceedings20 on the ground that it availed of the Tax
Amnesty Program under Republic Act 948021 (RA 9480),
otherwise known as the Tax Amnesty Act of 2007. On February
13, 2008, it submitted to the Court a Certification of
Qualification22 issued by the BIR on February 5, 2008 stating
that AIA "has availed and is qualified for Tax Amnesty for the
Taxable Year 2005 and Prior Years" pursuant to RA 9480.
Issue/s:
With AIAs availment of the Tax Amnesty Program under RA
9480, the Court is tasked to first determine its effects on the
instant petition.
Ruling:
A tax amnesty is a general pardon or the intentional overlooking
by the State of its authority to impose penalties on persons
otherwise guilty of violating a tax law. It partakes of an absolute
waiver by the government of its right to collect what is due it
and to give tax evaders who wish to relent a chance to start
with a clean slate.23
10
A tax amnesty, much like a tax exemption, is never favored or
presumed in law. The grant of a tax amnesty, similar to a tax
exemption, must be construed strictly against the taxpayer and
liberally in favor of the taxing authority.24
In 2007, RA 9480 took effect granting a tax amnesty to qualified
taxpayers for all national internal revenue taxes for the taxable
year 2005 and prior years, with or without assessments duly
issued therefor, that have remained unpaid as of December 31,
2005.25
The Tax Amnesty Program under RA 9480 may be availed of by
any person except those who are disqualified under Section 8
thereof, to wit:
Section 8. Exceptions. The tax amnesty provided in Section 5
hereof shall not extend to the following persons or cases
existing as of the effectivity of this Act:
(a) Withholding agents with respect to their withholding tax
liabilities;
(b) Those with pending cases falling under the jurisdiction of the
Presidential Commission on Good Government;
(c) Those with pending cases involving unexplained or
unlawfully acquired wealth or under the Anti-Graft and Corrupt
Practices Act;
(d) Those with pending cases filed in court involving violation of
the Anti-Money Laundering Law;
(e) Those with pending criminal cases for tax evasion and other
criminal offenses under Chapter II of Title X of the National
Internal Revenue Code of 1997, as amended, and the felonies of
frauds, illegal exactions and transactions, and malversation of
public funds and property under Chapters III and IV of Title VII of
the Revised Penal Code; and
(f) Tax cases subject of final and executory judgment by the
courts.(Emphasis supplied)
The CIR contends that AIA is disqualified under Section 8(a) of
RA 9480 from availing itself of the Tax Amnesty Program
because it is "deemed" a withholding agent for the deficiency
taxes. This argument is untenable.
The CIR did not assess AIA as a withholding agent that failed to
withhold or remit the deficiency VAT and excise tax to the BIR
under relevant provisions of the Tax Code. Hence, the argument
that AIA is "deemed" a withholding agent for these deficiency
taxes is fallacious.
Indirect taxes, like VAT and excise tax, are different from
withholding taxes.1wphi1 To distinguish, in indirect taxes, the
incidence of taxation falls on one person but the burden thereof
can be shifted or passed on to another person, such as when the
tax is imposed upon goods before reaching the consumer who
ultimately pays for it.26 On the other hand, in case of
withholding taxes, the incidence and burden of taxation fall on
the same entity, the statutory taxpayer. The burden of taxation
is not shifted to the withholding agent who merely collects, by
withholding, the tax due from income payments to entities
arising from certain transactions27and remits the same to the
government. Due to this difference, the deficiency VAT and
excise tax cannot be "deemed" as withholding taxes merely
because they constitute indirect taxes. Moreover, records
support the conclusion that AIA was assessed not as a
withholding agent but, as the one directly liable for the said
deficiency taxes.28
The CIR also argues that AIA, being an accredited
investor/taxpayer situated at the Subic Special Economic Zone,
should have availed of the tax amnesty granted under RA
939929 and not under RA 9480. This is also untenable.
RA 9399 was passed prior to the passage of RA 9480. RA 9399
does not preclude taxpayers within its coverage from availing of
other tax amnesty programs available or enacted in futuro like
RA 9480. More so, RA 9480 does not exclude from its coverage
taxpayers operating within special economic zones. As long as it
is within the bounds of the law, a taxpayer has the liberty to
choose which tax amnesty program it wants to avail.
Lastly, the Court takes judicial notice of the "Certification of
Qualification"30 issued by Eduardo A. Baluyut, BIR Revenue
District Officer, stating that AlA "has availed and is qualified for
Tax Amnesty for the Taxable Year 2005 and Prior Years" pursuant
to RA 9480. In the absence of sufficient evidence proving that
the certification was issued in excess of authority, the
presumption that it was issued in the regular performance of the
revenue district officer's official duty stands.31
2nd Batch
PPI vs Fertiphil
Facts:
- Planters Products Inc. (PPI) and Fertiphil Corp. are
domestic corp. engaged in the business of importation
and distribution of fertilizers, pesticides and agricultural
chemicals.
- By virtue of LOI No. 1465 issued by then Pres. Marcos,
Fertiphil and other domestic corps paid P10.00. for
every bag of fertilizer sold to Fertilizer and Pesticide
Authority (FPA)
- FPA then in turn remitted the amount to PPI for its
rehabilitation according to the express mandate of the
LOI
- After EDSA, the imposition of P10.00 by the FPA was
voluntarily stopped.
- Fertiphil demanded from PPI the refund of
P6,698,144.00
- PPI refused.
- Fertiphil filed a case for collection and a damage suit
against FPA and PPI in the RTC.
- RTC: declared the LOI as void and unconstitutional.
- Trial court granted Fertiphils motion for the issuance of
a writ of execution pending appeal.
- PPI assailed the propriety of the execution pending
appeal before the CA and SC.
- SC: ordered Fertiphil to return all the property of PPI
taken in the course of execution pending appeal or
value thereof.
- After decision became final and executory, PPI moved
for its execution before the trial court.
- Fertiphil moved to dismiss PPIs appeal to the trial
courts decision dated Nov, 20,1991 citing as grounds
the non-payment of appellate docket fees and alleged
failure of PPI to prosecute the appeal within a
reasonable time.
- Trial court denied the motion. Payment of the appellate
docket fee is a new requirement under the 1997 Rules
of Civil Procedure which was not yet applicable when
PPI filed its appeal in 1992.
11
 - CA held that although PPI filed its appeal in 1992, the
1997 Rules of Civil Procedure should be followed since
it applies to actions pending and undetermined at the
time of passage. Thus, due to PPIs failure to pay
appellate docket fee, the trial courts decision became
final and executory.
Issue:
Whether or not the 1997 Rules of Civil Procedure be applied
retroactively.
Held:
Supreme Court held that as a GR: Rules of procedure apply to
actions pending and undetermined at the time of their pasaage,
hence retrospective in nature. But as an exception, such
retroactive application is only allowed if no vested rights are
impaired.
-PPI filed its appeal in 1992 and all the requirements for the
perfection of appeal was the filing of the Notice of Appeal with
the court which rendered the judgment. PPI complied.
-The 1997 Rules of Civil Procedure which took effect on July 1,
1997 and which required that appellate docket and other lawful
fees should be paid within the same period for perfecting an
appeal. But in this case, it will not affect PPIs appeal which was
already perfected in 1992.
G.R. No. 149110 April 9, 2003 NATIONAL POWER
CORPORATION vs. CITY OF CABANATUAN
FACTS:
The City of Cabantuan assessed franchise taxes on National
Power Corporation (NPC) pursuant to Ordinance No. 165-92. NPC
is a government-owned and controlled corporation created
under Commonwealth Act No. 120, as amended, tasked to
undertake the "development of hydroelectric generations of
power and the production of electricity from nuclear, geothermal
and other sources, as well as, the transmission of electric power
on a nationwide basis." NPC sells electric power to the residents
of Cabanatuan City,
NPC, whose capital stock was subscribed and paid wholly by the
Philippine Government, refused to pay the tax assessment. It
argued that the respondent has no authority to impose tax on
government entities. It also contended that as a non-profit
organization, it is exempted from the payment of all forms of
taxes, charges, duties or fees in accordance with sec. 13 of Rep.
Act No. 6395. It contends that sections 137 and 151 of the LGC
in relation to section 131, limit the taxing power of the
respondent city government to private entities that are engaged
in trade or occupation for profit. Since it is government
instrumentality, it may not be taxed by the City government
citing Basco vs PAGCOR. Another contention is that the provision
in the LGC, which is a general law withdrawing the exemption
cannot prevail over or impliedly repeal the exemption granted
by its charter which is a special law. In fact, its charter should
prevail over the LGC because that the power of the local
government to impose franchise tax is subordinate to
petitioner's exemption from taxation which is an exercise of
police power.
The respondent filed a collection suit in the Regional Trial Court
of Cabanatuan City, demanding that petitioner pay the assessed
tax due, plus a surcharge equivalent to 25% of the amount of
tax, and 2% monthly interest. Respondent alleged that
petitioner's exemption from local taxes has been repealed by
section 193 of Rep. Act No. 7160.
ISSUES:
1) WON National Power Corporation is liable to pay franchise tax
to the City of Cabanatuan
2) WON the enactment of the new LGC (RA 7160) has withdrawn
the tax exemption granted to NPC in RA 6395
RULING:
1) NPC is liable for payment of the annual franchise tax to the
city government.
a. Lifeblood Doctrine; History and importance of Local Taxation
b. The Basco case was decided prior to the effectivity of the
LGC, when no law empowering the local government units to tax
instrumentalities of the National Government was in effect.
However, as this Court ruled in the case of Mactan Cebu
International Airport Authority (MCIAA) vs. Marcos, In section
131 (m) of the LGC, Congress unmistakably defined a franchise
in the sense of a secondary or special franchise. This is to avoid
any confusion when the word franchise is used in the context of
taxation. As commonly used, a franchise tax is "a tax on the
privilege of transacting business in the state and exercising
corporate franchises granted by the state."53 It is not levied on
the corporation simply for existing as a corporation, upon its
property54 or its income,55 but on its exercise of the rights or
privileges granted to it by the government. Hence, a corporation
need not pay franchise tax from the time it ceased to do
business and exercise its franchise.56 It is within this context
that the phrase "tax on businesses enjoying a franchise" in
section 137 of the LGC should be interpreted and understood.
Verily, to determine whether the petitioner is covered by the
franchise tax in question, the following requisites should concur:
(1) that petitioner has a "franchise" in the sense of a secondary
or special franchise; and (2) that it is exercising its rights or
privileges under this franchise within the territory of the
respondent city government nothing prevents Congress from
decreeing that even instrumentalities or agencies of the
government performing governmental functions may be subject
to tax.46 In enacting the LGC, Congress exercised its
prerogative to tax instrumentalities and agencies of government
as it sees fit. Thus, after reviewing the specific provisions of the
LGC, this Court held that MCIAA, although an instrumentality of
the national government, was subject to real property tax,
c. In section 131 (m) of the LGC, Congress unmistakably defined
a franchise in the sense of a secondary or special franchise. This
is to avoid any confusion when the word franchise is used in the
context of taxation. As commonly used, a franchise tax is "a tax
on the privilege of transacting business in the state and
exercising corporate franchises granted by the state."53 It is not
levied on the corporation simply for existing as a corporation,
upon its property54 or its income,55 but on its exercise of the
rights or privileges granted to it by the government. Hence, a
corporation need not pay franchise tax from the time it ceased
to do business and exercise its franchise.56 It is within this
context that the phrase "tax on businesses enjoying a franchise"
in section 137 of the LGC should be interpreted and understood.
Verily, to determine whether the petitioner is covered by the
franchise tax in question, the following requisites should concur:
(1) that petitioner has a "franchise" in the sense of a secondary
or special franchise; and (2) that it is exercising its rights or
privileges under this franchise within the territory of the
respondent city government. On the basis of its gross income
and its charter, both of these requisites are fulfilled.
d) To stress, a franchise tax is imposed based not on the
ownership but on the exercise by the corporation of a privilege
to do business. The taxable entity is the corporation which
exercises the franchise, and not the individual stockholders. By
virtue of its charter, petitioner was created as a separate and
distinct entity from the National Government. It can sue and be
sued under its own name,61 and can exercise all the powers of a
corporation under the Corporation Code. The ownership by the
National Government of its entire capital stock does not
necessarily imply that petitioner is not engaged in business.
2) The LGC provision has withdrawn NPCs tax exemption, citing
as basis MERALCO vs Province of Laguna:
Section 193 buttresses the withdrawal of extant tax exemption
privileges. By stating that unless otherwise provided in this
Code, tax exemptions or incentives granted to or presently
enjoyed by all persons, whether natural or juridical, including
government-owned or controlled corporations except (1) local
water districts, (2) cooperatives duly registered under R.A. 6938,
(3) non-stock and non-profit hospitals and educational
institutions, are withdrawn upon the effectivity of this code, the
12
obvious import is to limit the exemptions to the three
enumerated entities. Reading together sections 137 and 193 of
the LGC, we conclude that under the LGC the local government
unit may now impose a local tax at a rate not exceeding 50% of
1% of the gross annual receipts for the preceding calendar
based on the incoming receipts realized within its territorial
jurisdiction. The legislative purpose to withdraw tax privileges
enjoyed under existing law or charter is clearly manifested by
the language used on (sic) Sections 137 and 193 categorically
withdrawing such exemption subject only to the exceptions
enumerated. Since it would be not only tedious and impractical
to attempt to enumerate all the existing statutes providing for
special tax exemptions or privileges, the LGC provided for an
express, albeit general, withdrawal of such exemptions or
privileges. No more unequivocal language could have been
used
ABAKADA GURO PARTY LIST et al. vs. THE HONORABLE
EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE
SECRETARY OF THE DEPARTMENT OF FINANCE CESAR
PURISIMA; and HONORABLE COMMISSIONER OF
INTERNAL REVENUE GUILLERMO PARAYNO, JR. (G.R. No.
168056, September 1, 2005)
FACTS
R.A. No. 9337 (R-VAT Law) is a consolidation of three legislative
billsHouse Bill Nos. 3555 and 3705, and Senate Bill No. 1950.
The President signed R.A. 9337 into law on May 24, 2005 and it
took effect on July 1, 2005. Thereafter, the Court issued a
temporary restraining order, effective immediately, enjoining
respondents from enforcing and implementing the law.
In G.R. No. 168056 Petitioners ABAKADA GURO Party List, et al.
questioned the constitutionality of Sections 4 (imposing a 10%
VAT on sale of goods and properties), Section 5 (imposing a 10%
VAT on importation of goods) and Section 6 (imposing a 10%
VAT on sale of services and use or lease of properties) of R.A.
No. 9337, as they constitute abandonment by Congress of its
exclusive authority to fix the rate of taxes under Article VI,
Section 28(2) of the 1987 Philippine Constitution. These
questioned provisions contain a uniform proviso authorizing the
President, upon recommendation of the Secretary of Finance, to
raise the VAT rate to 12%, effective January 1, 2006, under the
following conditions:
(1) VAT collection as a percentage of Gross Domestic Product
(GDP) of the previous year exceeds 2 4/5 %; or
(2) National government deficit as a percentage of GDP of the
previous year exceeds 1 %.
In G.R. No. 168207, Sen. Aquilino Q. Pimentel, Jr., et al., filed a
petition for certiorari likewise assailing the constitutionality of
Sections 4, 5 and 6. Aside from questioning the so-called stand-
by authority of the President to increase the VAT rate to 12% on
the ground that it amounts to an undue delegation of legislative
power, the increase in the VAT rate to 12% contingent on any of
the two conditions being satisfied violates the due process
clause embodied in Article III, Section 1 of the Constitution as it
imposes an unfair and additional tax burden on the people, in
that: (1) the 12% increase is ambiguous because it does not
state if the rate would be returned to the original 10% if the
conditions are no longer satisfied; (2) the people are unsure of
the applicable VAT rate from year to year; and (3) the increase
in the VAT rate, which is supposed to be an incentive to the
President to raise the VAT collection to at least 2 4/5 of the GDP
of the previous year, should only be based on fiscal adequacy.
In G.R. No. 168461, the Association of Pilipinas Shell Dealers,
Inc.,et al., assailed the following provisions:
1) Section 8, requiring that the input tax on depreciable goods
shall be amortized over a 60-month period, if the acquisition,
excluding the VAT components, exceeds P1, 000,000.00;
2) Section 8, imposing a 70% limit on the amount of input tax to
be credited against the output tax; and
3) Section 12, authorizing the Government or any of its political
subdivisions, instrumentalities or agencies, including GOCCs, to
deduct a 5% final withholding tax on gross payments of goods
and services, which are subject to 10% VAT under Sections 106
(sale of goods and properties) and 108 (sale of services and use
or lease of properties) of the NIRC. Petitioners contend that
these provisions are unconstitutional for being arbitrary,
oppressive, excessive, and confiscatory.
According to petitioners, the contested sections impose
limitations on the amount of input tax that may be claimed, that
the input tax partakes the nature of a property that may not be
confiscated, appropriated, or limited without due process of law,
and that like any other property or property right, the input tax
credit may be transferred or disposed of, and that by limiting
the same, the government gets to tax a profit or value-added
even if there is no profit or value-added.
Petitioners also believe that these provisions violate the
constitutional guarantee of equal protection of the law under
Article III, Section 1 of the Constitution, as the limitation on the
creditable input tax if: (1) the entity has a high ratio of input tax;
or (2) invests in capital equipment; or (3) has several
transactions with the government, is not based on real and
substantial differences to meet a valid classification.
Lastly, petitioners contend that the 70% limit is anything but
progressive, violative of Article VI, Section 28(1) of the
Constitution, and that it is the smaller businesses with higher
input tax to output tax ratio that will suffer the consequences
thereof for it wipes out whatever meager margins the
petitioners make.
In G.R. No. 168463, several members of the House of
Representatives led by Rep. Francis Joseph G. Escudero filed a
petition for certiorari questioning the constitutionality of R.A. No.
9337 in that Sections 4, 5, and 6 of R.A. No. 9337 constitute an
undue delegation of legislative power and that certain Sections
inserted by the Bicameral Conference Committee which were
present in Senate Bill No. 1950, violates Article VI, Section 24(1)
of the Constitution, which provides that all appropriation,
revenue or tariff bills shall originate exclusively in the House of
Representatives.
In G.R. No. 168730, Governor Enrique T. Garcia filed a petition
for certiorari and prohibition alleging unconstitutionality of the
law on the ground that the limitation on the creditable input tax
in effect allows VAT-registered establishments to retain a portion
of the taxes they collect, thus violating the principle that tax
collection and revenue should be solely allocated for public
purposes and expenditures. Petitioner Garcia further claims that
allowing these establishments to pass on the tax to the
consumers is inequitable, in violation of Article VI, Section 28(1)
of the Constitution.
MAIN ISSUE
Whether or not R.A. No. 9337 is unconstitutional;
PROCEDURAL ISSUE:
Whether or not R.A. No. 9337 violates Article VI, Section 24 of
the 1987 Constitution (all appropriation, revenue or tariff bills
shall originate exclusively in the House of Representatives);
SUBSTANTIVE ISSUES:
(1) Whether or not the 12% VAT rate increase impose an unfair
and unnecessary additional tax burden;
(2) With regard to Sections 4, 5 and 6 of R.A. No. 9337, whether
there is undue delegation of legislative power;
(3) Whether Sections 8 and 12 violate Article III, Section 1 (due
process clause and equal protection clause), and Article VI,
Section 28(1) (progressive system of taxation);
RULING
13
R.A. No. 9337 is constitutional.
PROCEDURAL ISSUE
(1) R.A. No. 9337 does not violate Article VI, Section 24 of the
Constitution on Exclusive Origination of Revenue Bills.
Petitioners claim that the amendments to certain provisions of
the NIRC did not at all originate from the House. The sections of
the NIRC which the Senate amended are not intended to be
amended by the House of Representatives in violation of Article
VI, Section 24 of the Constitution, which reads: Sec. 24. All
appropriation, revenue or tariff bills, bills authorizing increase of
the public debt, bills of local application, and private bills shall
originate exclusively in the House of Representatives but the
Senate may propose or concur with amendments.
In the present cases, it was House Bill Nos. 3555 and 3705 that
initiated the move for amending provisions of the NIRC dealing
mainly with the value-added tax. Upon transmittal of said House
bills to the Senate, the Senate came out with Senate Bill No.
1950 proposing amendments not only to NIRC provisions on the
value-added tax but also amendments to NIRC provisions on
other kinds of taxes.
What the Constitution simply means is that the initiative for
filing revenue, tariff or tax bills, bills authorizing an increase of
the public debt, private bills and bills of local application must
come from the House of Representatives on the theory that,
elected as they are from the districts, the members of the House
can be expected to be more sensitive to the local needs and
problems. On the other hand, the senators, who are elected at
large, are expected to approach the same problems from the
national perspective. In Tolentino vs. Secretary of Finance, the
Court held, thus: it is not the law but the revenue bill which is
required by the Constitution to "originate exclusively" in the
House of Representatives. A bill originating in the House may
undergo such extensive changes in the Senate that the result
may be a rewriting of the whole. As a result of the Senate
action, a distinct bill may be produced. To insist that a revenue
statute and not only the bill which initiated the legislative
process culminating in the enactment of the law must
substantially be the same as the House bill would be to deny the
Senates power not only to "concur with amendments" but also
to "propose amendments." It would be to violate the coequality
of legislative power of the two houses of Congress and in fact
make the House superior to the Senate.
Since there is no question that the revenue bill exclusively
originated in the House of Representatives, the Senate was
acting within its constitutional power to introduce amendments
to the House bill when it included provisions in Senate Bill No.
1950 amending corporate income taxes, percentage, excise and
franchise taxes. Verily, Article VI, Section 24 of the Constitution
does not contain any prohibition or limitation on the extent of
the amendments that may be introduced by the Senate to the
House revenue bill. Furthermore, the amendments introduced by
the Senate to the NIRC provisions that had not been touched in
the House bills are in furtherance of the intent of the House in
initiating the subject revenue bills and are germane to the
subject matter and purposes of the house bills, which is to
supplement our countrys fiscal deficit, among others. Thus, the
Senate acted within its power to propose those amendments.
SUBSTANTIVE ISSUES
(1) The 12% Increase VAT Rate Does Not Impose an Unfair and
Unnecessary Additional Tax Burden.
Petitioners argue that the 12% increase in the VAT rate imposes
an unfair and additional tax burden on the people and that the
12% increase, dependent on any of the 2 conditions set forth in
the contested provisions, is ambiguous because it does not state
if the VAT rate would be returned to the original 10% if the rates
are no longer satisfied. Petitioners also argue that such rate is
unfair and unreasonable, as the people are unsure of the
applicable VAT rate from year to year.
Under the common provisos of Sections 4, 5 and 6 of R.A. No.
9337, if any of the two conditions set forth therein are satisfied,
the President shall increase the VAT rate to 12%. The provisions
of the law are clear. It does not provide for a return to the 10%
rate nor does it empower the President to so revert if, after the
rate is increased to 12%, the VAT collection goes below the 24/5
of the GDP of the previous year or that the national government
deficit as a percentage of GDP of the previous year does not
exceed 1%.
There is no basis for petitioners fear of a fluctuating VAT rate
because the law itself does not provide that the rate should go
back to 10% if the conditions provided in Sections 4, 5 and 6 are
no longer present. The rule is that where the provision of the law
is clear and unambiguous, so that there is no occasion for the
court's seeking the legislative intent, the law must be taken as it
is, devoid of judicial addition or subtraction.
Petitioners also contend that the increase in the VAT rate, which
was allegedly an incentive to the President to raise the VAT
collection to at least 2 4/5 of the GDP of the previous year,
should be based on fiscal adequacy.
Petitioners obviously overlooked that increase in VAT collection
is not the only condition. There is another condition, i.e., the
national government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1 %). The
condition set for increasing VAT rate to 12% has economic or
fiscal meaning. If VAT/GDP is less than 2.8%, it means that
government has weak or no capability of implementing the VAT
or that VAT is not effective in the function of the tax collection.
Therefore, there is no value to increase it to 12% because such
action will also be ineffectual.
The condition set for increasing VAT when deficit/GDP is 1.5% or
less means the fiscal condition of government has reached a
relatively sound position or is towards the direction of a
balanced budget position. Therefore, there is no need to
increase the VAT rate since the fiscal house is in a relatively
healthy position. Otherwise stated, if the ratio is more than
1.5%, there is indeed a need to increase the VAT rate.
That the first condition amounts to an incentive to the President
to increase the VAT collection does not render it unconstitutional
so long as there is a public purpose for which the law was
passed, which in this case, is mainly to raise revenue. In fact,
fiscal adequacy dictated the need for a raise in revenue. The
principle of fiscal adequacy simply means that sources of
revenues must be adequate to meet government expenditures
and their variations.
(2) There is no Undue Delegation of Legislative Power.
Petitioners contend in common that Sections 4, 5 and 6 of R.A.
No. 9337 giving the President the stand-by authority to raise the
VAT rate from 10% to 12% when a certain condition is met,
constitutes undue delegation of the legislative power to tax.
They allege that the grant of the stand-by authority to the
President to increase the VAT rate is a virtual abdication by
Congress of its exclusive power to tax because such delegation
is not within the purview of Section 28 (2), Article VI of the
Constitution, which provides: The Congress may, by law,
authorize the President to fix within specified limits, and may
impose, tariff rates, import and export quotas, tonnage and
wharfage dues, and other duties or imposts within the
framework of the national development program of the
government. They argue that the VAT is a tax levied on the
sale, barter or exchange of goods and properties as well as on
the sale or exchange of services, which cannot be included
within the purview of tariffs as the latter refers to customs
duties, tolls or tribute payable upon merchandise to the
government and usually imposed on goods or merchandise
imported or exported.
The principle of separation of powers ordains that each of the
three great branches of government has exclusive cognizance of
and is supreme in matters falling within its own constitutionally
allocated sphere. Thus the corollary principle of non-delegation
of powerspotestas delegata non delegari potest (what has
been delegated, cannot be delegated). As far as the legislature
is concerned, purely legislative power, which can never be
14
delegated, has been described as the authority to make a
complete law complete as to the time when it shall take effect
and as to whom it shall be applicable and to determine the
expediency of its enactment.
In every case of permissible delegation, there must be a
showing that the delegation itself is valid. It is valid only if the
law (a) is complete in itself, setting forth therein the policy to be
executed, carried out, or implemented by the delegate; and (b)
fixes a standard the limits of which are sufficiently
determinate and determinable to which the delegate must
conform in the performance of his functions. A sufficient
standard is one which defines legislative policy, marks its limits,
maps out its boundaries and specifies the public agency to apply
it. It indicates the circumstances under which the legislative
command is to be effected. The test whether or not a statute
constitutes an undue delegation of legislative power is whether
the statute was complete in all its terms and provisions when it
left the hands of the legislature so that nothing was left to the
judgment of any other appointee or delegate of the legislature
(People v. Vera).
However, a distinction must be made between delegation of
power to make the laws which necessarily involves discretion as
to what it shall be, which constitutionally may not be done, and
delegation of authority or discretion as to its execution to be
exercised under and in pursuance of the law, to which no valid
objection can be made. What is thus left to the administrative
official is not the legislative determination of what public policy
demands, but simply the ascertainment of what the facts of the
case require to be done according to the terms of the law by
which he is governed. The legislature may provide that a law
shall take effect upon the happening of future specified
contingencies leaving to some other person or body the power
to determine when the specified contingency has arisen, but the
legislature must prescribe sufficient standards, policies or
limitations on their authority.
Therefore, under the challenged section of R.A. No. 9337 is the
common proviso in Sections 4, 5 and 6 which contains the
ministerial duty of the President to immediately impose the 12%
rate upon the existence of any of the conditions specified by
Congress. Inasmuch as the law specifically uses the word shall,
the time of taking into effect of the 12% VAT rate is based on the
happening of a certain specified contingency, or upon the
ascertainment of certain facts or conditions by a person or body
other than the legislature itself.
Furthermore, the Court finds no merit to the contention of
petitioners that the law effectively nullified the Presidents
power of control over the Secretary of Finance by mandating the
fixing of the tax rate by the President upon the
recommendation of the Secretary of Finance. Congress simply
granted the Secretary of Finance the authority to ascertain the
existence of a fact, namely, whether by December 31, 2005, the
value-added tax collection as a percentage of Gross Domestic
Product (GDP) of the previous year exceeds 24/5% or the
national government deficit as a percentage of GDP of the
previous year exceeds 1%. If either of these two instances has
occurred, the Secretary of Finance, by legislative mandate, must
submit such information to the President. Then the 12% VAT rate
must be imposed by the President effective January 1, 2006.
There is no undue delegation of legislative power but only of the
discretion as to the execution of a law. This is constitutionally
permissible. Congress does not abdicate its functions or unduly
delegate power when it describes what job must be done, who
must do it, and what is the scope of his authority.
(3) There is no violation of the Due Process Clause and Equal
Protection Clause.
Petitioners argue that Section 8 and Section 12 of R.A. No. 9337
are arbitrary, oppressive, excessive and confiscatory premised
on the constitutional right against deprivation of life, liberty of
property without due process of law, as embodied in Article III,
Section 1 of the Constitution. Petitioners also contend that these
provisions violate the constitutional guarantee of equal
protection of the law.
Section 8 of R.A. No. 9337 imposes a limitation on the amount of
input tax that may be credited against the output tax. It states,
in part: "Provided, that the input tax inclusive of the input VAT
carried over from the previous quarter that may be credited in
every quarter shall not exceed seventy percent (70%) of the
output VAT.". Petitioners claim that the contested sections
impose limitations on the amount of input tax that may be
claimed. In effect, a portion of the input tax that has already
been paid cannot now be credited against the output tax.
Petitioners argument assumes that the input tax exceeds 70%
of the output tax, and therefore, the input tax in excess of 70%
remains uncredited. However, to the extent that the input tax is
less than 70% of the output tax, then 100% of such input tax is
still creditable. More importantly, the excess input tax, if any, is
retained in a businesss books of accounts and remains
creditable in the succeeding quarter/s. This is explicitly allowed
by Section 110(B), which provides that "if the input tax exceeds
the output tax, the excess shall be carried over to the
succeeding quarter or quarters." In addition, Section 112(B)
allows a VAT-registered person to apply for the issuance of a tax
credit certificate or refund for any unused input taxes, to the
extent that such input taxes have not been applied against the
output taxes. Such unused input tax may be used in payment of
his other internal revenue taxes.
The non-application of the unutilized input tax in a given quarter
is not ad infinitum, as petitioners exaggeratedly contend. It ends
at the net effect that there will be unapplied/unutilized inputs
VAT for a given quarter. It does not proceed further to the fact
that such unapplied/unutilized input tax may be credited in the
subsequent periods as allowed by the carry-over provision of
Section 110(B) or that it may later on be refunded through a tax
credit certificate under Section 112(B).
Input tax is the tax paid by a person, passed on to him by the
seller, when he buys goods. Output tax meanwhile is the tax
due to the person when he sells goods. In computing the VAT
payable, three possible scenarios may arise: (1) if at the end of
a taxable quarter the output taxes charged by the seller are
equal to the input taxes that he paid and passed on by the
suppliers, then no payment is required; (2) when the output
taxes exceed the input taxes, the person shall be liable for the
excess, which has to be paid to the Bureau of Internal Revenue
(BIR); and (3) if the input taxes exceed the output taxes, the
excess shall be carried over to the succeeding quarter or
quarters. Should the input taxes result from zero-rated or
effectively zero-rated transactions, any excess over the output
taxes shall instead be refunded to the taxpayer or credited
against other internal revenue taxes, at the taxpayers option.
Section 8 of R.A. No. 9337 however, imposed a 70% limitation
on the input tax. Thus, a person can credit his input tax only up
to the extent of 70% of the output tax. In laymans term, the
value-added taxes that a person/taxpayer paid and passed on to
him by a seller can only be credited up to 70% of the value-
added taxes that is due to him on a taxable transaction. There is
no retention of any tax collection because the person/taxpayer
has already previously paid the input tax to a seller, and the
seller will subsequently remit such input tax to the BIR. The
party directly liable for the payment of the tax is the seller. What
only needs to be done is for the person/taxpayer to apply or
credit these input taxes, as evidenced by receipts, against his
output taxes.
Petitioners also argue that the input tax partakes the nature of a
property that may not be confiscated, appropriated, or limited
without due process of law.
The input tax is not a property or a property right within the
constitutional purview of the due process clause. A VAT-
registered persons entitlement to the creditable input tax is a
mere statutory privilege. The distinction between statutory
privileges and vested rights must be borne in mind for persons
have no vested rights in statutory privileges. The state may
change or take away rights, which were created by the law of
the state, although it may not take away property, which was
vested by virtue of such rights.
Petitioners also contest as arbitrary, oppressive, excessive and
confiscatory, Section 8 of R.A. No. 9337. The foregoing section
imposes a 60-month period within which to amortize the
15
creditable input tax on purchase or importation of capital goods
with acquisition cost of P1 Million, exclusive of the VAT
component. Such spread out only poses a delay in the crediting
of the input tax. Petitioners argument is without basis because
the taxpayer is not permanently deprived of his privilege to
credit the input tax.
It is worth mentioning that Congress admitted that the spread-
out of the creditable input tax in this case amounts to a 4-year
interest-free loan to the government. In the same breath,
Congress also justified its move by saying that the provision was
designed to raise an annual revenue of 22.6 billion.
With regard to the 5% creditable withholding tax imposed on
payments made by the government for taxable transactions,
Section 12 of R.A. No. 9337merely provided a more simplified
VAT withholding system. The government in this case is
constituted as a withholding agent with respect to their
payments for goods and services. Prior to its amendment by
Section 12, Section 114(C) of the NIRC provided for different
rates of value-added taxes to be withheld. Under the present
Section these different rates, except for the 10% on lease or
property rights payment to nonresidents, were deleted, and a
uniform rate of 5% is applied.
The equal protection clause under the Constitution means that
"no person or class of persons shall be deprived of the same
protection of laws which is enjoyed by other persons or other
classes in the same place and in like circumstances." The equal
protection clause does not require the universal application of
the laws on all persons or things without distinction. What the
clause requires is equality among equals as determined
according to a valid classification. By classification is meant the
grouping of persons or things similar to each other in certain
particulars and different from all others in these same
particulars. The power of the State to make reasonable and
natural classifications for the purposes of taxation has long been
established. Whether it relates to the subject of taxation, the
kind of property, the rates to be levied, or the amounts to be
raised, the methods of assessment, valuation and collection, the
States power is entitled to presumption of validity.
(4) R.A. 9337 satisfies the standards of Uniformity and
Equitability in Taxation.
Article VI, Section 28(1) of the Constitution reads in part: The
rule of taxation shall be uniform and equitable. Uniformity in
taxation means that all taxable articles or kinds of property of
the same class shall be taxed at the same rate. Different articles
may be taxed at different amounts provided that the rate is
uniform on the same class everywhere with all people at all
times.
In this case, the tax law is uniform as it provides a standard rate
of 0% or 10% (or 12%) on all goods and services. Sections 4, 5
and 6 of R.A. No. 9337, amending Sections 106, 107 and 108,
respectively, of the NIRC, provide for a rate of 10% (or 12%) on
sale of goods and properties, importation of goods, and sale of
services and use or lease of properties. These same sections
also provide for a 0% rate on certain sales and transaction. The
law does not make any distinction as to the type of industry or
trade that will bear the 70% limitation on the creditable input
tax, 5-year amortization of input tax paid on purchase of capital
goods or the 5% final withholding tax by the government. It
must be stressed that the rule of uniform taxation does not
deprive Congress of the power to classify subjects of taxation,
and only demands uniformity within the particular class.
R.A. No. 9337 is also equitable. The law is equipped with a
threshold margin. The VAT rate of 0% or 10% (or 12%) does not
apply to sales of goods or services with gross annual sales or
receipts not exceeding P1,500,000.00. Also, basic marine and
agricultural food products in their original state are still not
subject to the tax, thus ensuring that prices at the grassroots
level will remain accessible.
It is admitted that R.A. No. 9337 puts a premium on businesses
with low profit margins, and unduly favors those with high profit
margins. Congress was not oblivious to this. Thus, to equalize
the weighty burden the law entails, the law, under Section 116,
imposed a 3% percentage tax on VAT-exempt persons under
Section 109(v), i.e., transactions with gross annual sales and/or
receipts not exceeding P1.5 Million. This acts as a equalizer
because in effect, bigger businesses that qualify for VAT
coverage and VAT-exempt taxpayers stand on equal-footing.
Moreover, Congress provided mitigating measures to cushion
the impact of the imposition of the tax on those previously
exempt. Excise taxes on petroleum products and natural gas
were reduced. Percentage tax on domestic carriers was
removed. Power producers are now exempt from paying
franchise tax. Aside from these, Congress also increased the
income tax rates of corporations, in order to distribute the
burden of taxation. Domestic, foreign, and non-resident
corporations are now subject to a 35% income tax rate, from a
previous 32%. Intercorporate dividends of non-resident foreign
corporations are still subject to 15% final withholding tax but the
tax credit allowed on the corporations domicile was increased
to 20%. The Philippine Amusement and Gaming Corporation
(PAGCOR) is not exempt from income taxes anymore. Even the
sale by an artist of his works or services performed for the
production of such works was not spared. All these were
designed to ease, as well as spread out, the burden of taxation,
which would otherwise rest largely on the consumers.
(5) There is no violation of the Progressive System of Tax
Principle.
Lastly, petitioners contend that the limitation on the creditable
input tax is anything but progressive. It is the smaller business
with higher input tax-output tax ratio that will suffer the
consequences.
Progressive taxation is built on the principle of the taxpayers
ability to pay. Taxation is progressive when its rate goes up
depending on the resources of the person affected.
The VAT is an antithesis of progressive taxation. By its very
nature, it is regressive. The principle of progressive taxation has
no relation with the VAT system inasmuch as the VAT paid by the
consumer or business for every goods bought or services
enjoyed is the same regardless of income. The disparity lies in
the income earned by a person or profit margin marked by a
business, such that the higher the income or profit margin, the
smaller the portion of the income or profit that is eaten by VAT.
Conversely, the lower the income or profit margin, the bigger
the part that the VAT eats away. At the end of the day, it is really
the lower income group or businesses with low-profit margins
that is always hardest hit.
Nevertheless, the Constitution does not really prohibit the
imposition of indirect taxes, like the VAT. What it simply provides
is that Congress shall "evolve a progressive system of taxation."
The Court stated in the Tolentino case, thus: The Constitution
does not really prohibit the imposition of indirect taxes which,
like the VAT, are regressive. What it simply provides is that
Congress shall evolve a progressive system of taxation. The
constitutional provision has been interpreted to mean simply
that direct taxes are to be preferred as much as possible,
indirect taxes should be minimized. Indeed, the mandate to
Congress is not to prescribe, but to evolve, a progressive tax
system. Otherwise, sales taxes which are regressive, which
perhaps are the oldest form of indirect taxes, would have been
prohibited with the proclamation of Art. VI, Section 28 (1).
All things considered, there is no raison d'tre for the
unconstitutionality of R.A. No. 9337.
G.R. No. 153793 August 29, 2006
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.JULIANE BAIER-NICKEL, as represented by Marina Q.
Guzman (Attorney-in-fact) Respondent.
FACTS:
Respondent Juliane Baier-Nickel, a non-resident German citizen,
is the President of JUBANITEX, Inc., a domestic corporation
engaged in "manufacturing, marketing on wholesale only,
buying or otherwise acquiring, holding, importing and exporting,
16
selling and disposing embroidered textile products." Through
JUBANITEXs General Manager, Marina Q. Guzman, the
corporation appointed and engaged the services of respondent
as commission agent. It was agreed that respondent will receive
10% sales commission on all sales actually concluded and
collected through her efforts.
In 1995, respondent received the amount of P1,707,772.64,
representing her sales commission income from which
JUBANITEX withheld the corresponding 10% withholding tax
amounting to P170,777.26, and remitted the same to the BIR.
On April 14, 1998, respondent filed a claim to refund the amount
of P170,777.26 alleged to have been mistakenly withheld and
remitted by JUBANITEX to the BIR. Respondent contended that
her sales commission income is not taxable in the Philippines
because the same was a compensation for her services
rendered in Germany and therefore considered as income from
sources outside the Philippines. Source, according to respondent
is the situs of the activity which produced the income. And since
the source of her income were her marketing activities in
Germany, the income she derived from said activities is not
subject to Philippine income taxation.
The BIR denied respondents claim for refund.
ISSUE:
Whether or not respondents sales commission income is
taxable in the Philippines.
RULING:
Respondents sales commission income is taxable in the
Philippines; hence, she is not entitled a refund.
Pursuant to Sec. 25 (A(1)) & (B) of the NIRC, non-resident aliens,
whether or not engaged in trade or business, are subject to
Philippine income taxation on their income received from all
sources within the Philippines. Thus, the keyword in determining
the taxability of non-resident aliens is the incomes "source."
"Source" is not a place, it is an activity or property. As such, it
has a situs or location, and if that situs or location is within the
United States the resulting income is taxable to nonresident
aliens and foreign corporations.
The important factor therefore which determines the source of
income of personal services is not the residence of the payor, or
the place where the contract for service is entered into, or the
place of payment, but the place where the services were
actually rendered.
In the instant case, it is the place where the labor or service was
performed that determines the source of the income. There is
therefore no merit in petitioners interpretation which equates
source of income in labor or personal service with the residence
of the payor or the place of payment of the income.
After having established the principle, the decisive factual
consideration now is the sufficiency of evidence to prove that
the services she rendered were performed in Germany.
The settled rule is that tax refunds are in the nature of tax
exemptions and are to be construed strictissimi juris against the
taxpayer. To those therefore, who claim a refund rest the burden
of proving that the transaction subjected to tax is actually
exempt from taxation.
What she presented as evidence to prove that she performed
income producing activities abroad, were copies of documents
she allegedly faxed to JUBANITEX and bearing instructions as to
the sizes of, or designs and fabrics to be used in the finished
products as well as samples of sales orders purportedly relayed
to her by clients. However, these documents do not show
whether the instructions or orders faxed ripened into concluded
or collected sales in Germany. At the very least, these pieces of
evidence show that while respondent was in Germany, she sent
instructions/orders to JUBANITEX. As to whether these
instructions/orders gave rise to consummated sales and whether
these sales were truly concluded in Germany, respondent
presented no such evidence. Neither did she establish
reasonable connection between the orders/instructions faxed
and the reported monthly sales purported to have transpired in
Germany.
Furthermore, respondent presented no evidence to prove that
JUBANITEX does not sell embroidered products in the Philippines
and that her appointment as commission agent is exclusively for
Germany and other European markets.
In sum, we find that the faxed documents presented by
respondent did not constitute substantial evidence, or that
relevant evidence that a reasonable mind might accept as
adequate to support the conclusion that it was in Germany
where she performed the income producing service which gave
rise to the reported monthly sales in the months of March and
May to September of 1995. She thus failed to discharge the
burden of proving that her income was from sources outside the
Philippines and exempt from the application of our income tax
law. Hence, the claim for tax refund should be denied.
CIR vs. AMERICAN EXPRESS INTERNATIONAL, INC.
FACTS:
Respondent is a Philippine branch of American Express
International, Inc., a corporation duly organized and existing
under and by virtue of the laws of the State of Delaware, U.S.A.,
with office in the Philippines is engaged primarily to facilitate
the collections of Amex-HK receivables from card members
situated in the Philippines and payment to service
establishments in the Philippines.
Amex Philippines registered itself with the Bureau of Internal
Revenue (BIR) as a value-added tax (VAT) taxpayer and was
issued VAT Registration Certificate. On April 13, 1999,
respondent filed with the BIR a letter-request for the refund of its
1997 excess input taxes in the amount of P3,751,067.04, which
amount was arrived at after deducting from its total input VAT
paid of P3,763,060.43 its applied output VAT liabilities only for
the third and fourth quarters of 1997 amounting to P5,193.66
and P6,799.43, respectively. Respondent cites as basis therefor,
Section 110 (B) of the 1997 Tax Code, to state:
Section 110. Tax Credits. -
xxx xxx xxx
(B) Excess Output or Input Tax. - If at the end of any taxable
quarter the output tax exceeds the input tax, the excess shall be
paid by the VAT-registered person. If the input tax exceeds the
output tax, the excess shall be carried over to the succeeding
quarter or quarters. Any input tax attributable to the purchase
of capital goods or to zero-rated sales by a VAT-registered
person may at his option be refunded or credited against other
internal revenue taxes, subject to the provisions of Section 112.
There being no immediate action on the part of the petitioner,
respondent filed a Petition for Review. Respondent contends that
under Sec 102 the Tax Code, Export sales by a VAT-registered
person, the consideration for which is paid for in acceptable
foreign currency inwardly remitted to the Philippines and
accounted for in accordance with existing regulations of the
Bangko Sentral ng Pilipinas, are subject to [VAT] at zero percent
(0%). According to respondent, being a VAT-registered entity, it
is subject to the VAT imposed under Title IV of the Tax Code.
ISSUE:
WON respondent is entitled to the refund of the amount of
P3,352,406.59 allegedly representing excess input VAT for the
year 1997.
17
HELD:
Section 102. Value-added tax on sale of services.- (a) Rate and
base of tax. - There shall be levied, assessed and collected, a
value-added tax equivalent to 10% percent of gross receipts
derived by any person engaged in the sale of services. Xxx
Provided That the following services performed in the Philippines
by VAT-registered persons shall be subject to 0%:
(1) xxx
(2) Services other than those mentioned in the
preceding subparagraph, the consideration is paid for in
acceptable foreign currency which is remitted inwardly to the
Philippines and accounted for in accordance with the rules and
regulations of the BSP. x x x.
The law is very clear. Under the last paragraph quoted above,
services performed by VAT-registered persons in the Philippines
(other than the processing, manufacturing or repacking of goods
for persons doing business outside the Philippines), when paid in
acceptable foreign currency and accounted for in accordance
with the rules and regulations of the BSP, are zero-rated.
Respondent is a VAT-registered person that facilitates the
collection and payment of receivables belonging to its non-
resident (Hong Kong based) foreign client, for which it gets paid
in acceptable foreign currency inwardly remitted and accounted
for in conformity with BSP rules and regulations. Certainly, the
service it renders in the Philippines is not in the same category
as processing, manufacturing or repacking of goods and
should, therefore, be zero-rated.
As a general rule, the VAT system uses the destination principle
as a basis for the jurisdictional reach of the tax.[51] Goods and
services are taxed only in the country where they are consumed.
Thus, exports are zero-rated, while imports are taxed. Confusion
in zero rating arises because petitioner equates the
performance of a particular type of service with the
consumption of its output abroad. In the present case, the
facilitation of the collection of receivables is different from the
utilization or consumption of the outcome of such service. While
the facilitation is done in the Philippines, the consumption is not.
Respondent renders assistance to its foreign clients -- the ROCs
outside the country -- by receiving the bills of service
establishments located here in the country and forwarding them
to the ROCs abroad. The consumption contemplated by law,
contrary to petitioners administrative interpretation, does not
imply that the service be done abroad in order to be zero-rated.
Consumption is the use of a thing in a way that thereby
exhausts it.Applied to services, the term means the
performance or successful completion of a contractual duty,
usually resulting in the performers release from any past or
future liability x x x.The services rendered by respondent are
performed or successfully completed upon its sending to its
foreign client the drafts and bills it has gathered from service
establishments here. Its services, having been performed in the
Philippines, are therefore also consumed in the Philippines.
Unlike goods, services cannot be physically used in or bound for
a specific place when their destination is determined. Instead,
there can only be a predetermined end of a course when
determining the service location or position x x x for legal
purposes. Respondents facilitation service has no physical
existence, yet takes place upon rendition, and therefore upon
consumption, in the Philippines. Under the destination principle,
as petitioner asserts, such service is subject to VAT at the rate of
10 percent.
However, the law clearly provides for an exception to the
destination principle; that is, for a zero percent VAT rate for
services that are performed in the Philippines, paid for in
acceptable foreign currency and accounted for in accordance
with the rules and regulations of the [BSP].Thus, for the supply
of service to be zero-rated as an exception, the law merely
requires that first, the service be performed in the Philippines;
second, the service fall under any of the categories in Section
102(b) of the Tax Code; and, third, it be paid in acceptable
foreign currency accounted for in accordance with BSP rules and
regulations. Indeed, these three requirements for exemption
from the destination principle are met by respondent. Its
facilitation service is performed in the Philippines. It falls under
the second category found in Section 102(b) of the Tax Code,
because it is a service other than processing, manufacturing or
repacking of goods as mentioned in the provision. Undisputed
is the fact that such service meets the statutory condition that it
be paid in acceptable foreign currency duly accounted for in
accordance with BSP rules. Thus, it should be zero-rated. In
sum, having resolved that transactions of respondent are zero-
rated, the Court upholds the formers entitlement to the refund.
G.R. No. 144104 June 29, 2004 LUNG CENTER OF THE
PHILIPPINES, petitioner, vs.QUEZON CITY and
CONSTANTINO P. ROSAS, in his capacity as City Assessor
of Quezon City,respondents
FACTS:
Petitioner Lung Center of the Philippines is a non-stock and non-
profit entity. It is the registered owner of a parcel of land.
Erected in the middle of the aforesaid lot is a hospital known as
the Lung Center of the Philippines. A big space at the ground
floor is being leased to private parties, for canteen and small
store spaces, and to medical or professional practitioners who
use the same as their private clinics for their patients whom
they charge for their professional services. Almost one-half of
the entire area on the left side of the building along Quezon
Avenue is vacant and idle, while a big portion on the right side,
at the corner of Quezon Avenue and Elliptical Road, is being
leased for commercial purposes to a private enterprise known as
the Elliptical Orchids and Garden Center.
The petitioner accepts paying and non-paying patients. It also
renders medical services to out-patients, both paying and non-
paying. Aside from its income from paying patients, the
petitioner receives annual subsidies from the government.
On June 7, 1993, both the land and the hospital building of the
petitioner were assessed for real property taxes. The petitioner
filed a Claim for Exemption from real property taxes with the
City Assessor, predicated on its claim that it is a charitable
institution. The petitioners request was denied, and a petition
was, thereafter, filed before the Local Board of Assessment
Appeals of Quezon City (QC-LBAA, for brevity) for the reversal of
the resolution of the City Assessor. The petitioner alleged that
under Section 28, paragraph 3 of the 1987 Constitution, the
property is exempt from real property taxes. It averred that a
minimum of 60% of its hospital beds are exclusively used for
charity patients and that the major thrust of its hospital
operation is to serve charity patients. The petitioner contends
that it is a charitable institution and, as such, is exempt from
real property taxes. The QC-LBAA rendered judgment dismissing
the petition and holding the petitioner liable for real property
taxes.6
ISSUES:
(a) Whether the petitioner is a charitable institution within the
context of Presidential Decree No. 1823 and the 1973 and 1987
Constitutions and Section 234(b) of Republic Act No. 7160;
(b) Whether the real properties of the petitioner are exempt
from real property taxes.
RULING:
On the first issue, we hold that the petitioner is a charitable
institution within the context of the 1973 and 1987
Constitutions. To determine whether an enterprise is a charitable
institution/entity or not, the elements which should be
considered include the statute creating the enterprise, its
corporate purposes, its constitution and by-laws, the methods of
administration, the nature of the actual work performed, the
character of the services rendered, the indefiniteness of the
beneficiaries, and the use and occupation of the properties.11
Under P.D. No. 1823, the petitioner is a non-profit and non-stock
corporation which, subject to the provisions of the decree, is to
be administered by the Office of the President of the Philippines
with the Ministry of Health and the Ministry of Human
Settlements. It was organized for the welfare and benefit of the
Filipino people principally to help combat the high incidence of
lung and pulmonary diseases in the Philippines.
18
The medical services of the petitioner are to be rendered to the
public in general in any and all walks of life including those who
are poor and the needy without discrimination. After all, any
person, the rich as well as the poor, may fall sick or be injured or
wounded and become a subject of charity.
As a general principle, a charitable institution does not lose its
character as such and its exemption from taxes simply because
it derives income from paying patients, whether out-patient, or
confined in the hospital, or receives subsidies from the
government, so long as the money received is devoted or used
altogether to the charitable object which it is intended to
achieve; and no money inures to the private benefit of the
persons managing or operating the institution. The money
received by the petitioner becomes a part of the trust fund and
must be devoted to public trust purposes and cannot be
diverted to private profit or benefit.
Under P.D. No. 1823, the petitioner is entitled to receive
donations. The petitioner does not lose its character as a
charitable institution simply because the gift or donation is in
the form of subsidies granted by the government
second issue, that those portions of its real property that are
leased to private entities are not exempt from real property
taxes as these are not actually, directly and exclusively used for
charitable purposes.
The settled rule in this jurisdiction is that laws granting
exemption from tax are construed strictissimi juris against the
taxpayer and liberally in favor of the taxing power.
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in
order to be entitled to the exemption, the petitioner is burdened
to prove, by clear and unequivocal proof, that (a) it is a
charitable institution; and (b) its real properties are ACTUALLY,
DIRECTLY and EXCLUSIVELY used for charitable purposes.
"Exclusive" is defined as possessed and enjoyed to the exclusion
of others; debarred from participation or enjoyment; and
"exclusively" is defined, "in a manner to exclude; as enjoying a
privilege exclusively."40 If real property is used for one or more
commercial purposes, it is not exclusively used for the
exempted purposes but is subject to taxation.41 The words
"dominant use" or "principal use" cannot be substituted for the
words "used exclusively" without doing violence to the
Constitutions and the law.42 Solely is synonymous with
exclusively.43
Accordingly, we hold that the portions of the land leased to
private entities as well as those parts of the hospital leased to
private individuals are not exempt from such taxes.45 On the
other hand, the portions of the land occupied by the hospital
and portions of the hospital used for its patients, whether paying
or non-paying, are exempt from real property taxes.
CIR vs. St. Lukes
In a nutshell:
St. Lukes Medical Center, Inc. (St. Lukes) is a hospital organized
as a non-stock and non-profit corporation. St. Lukes accepts
both paying and non-paying patients. With respect to its non-
paying patients, St. Lukes is exempted from income tax
pursuant to Sec. 30 (E) and (G) of the NIRC for being a non-stock
corporation or organization operated exclusively for charitable
or social welfare purposes. Accepting paying patients does not
destroy the exemption of St. Lukes under Sec. 30 of the NIRC.
Instead, the last paragraph of Sec. 30 of the NIRC provides that
St. Lukes activities conducted for profit, regardless of the
disposition of such income, shall be subject to tax imposed
under this Code.
What is the income tax rate to be applied to St. Lukes activities
conducted for profit? With respect to its paying patients, St.
Lukes is subject to the 10% preferential tax rate of proprietary
non-profit hospitals under Section 27(B).
Relevant Sections:
Before discussing the case, let us take a look at the relevant
sections of the law in question.
Section 27(B) of the National Internal Revenue Code (NIRC)
states:
(B) Proprietary Educational Institutions and Hospitals.
Proprietary educational institutions and hospitals which
are non-profit shall pay a tax of ten percent (10%) on
their taxable income except those covered by Subsection (D)
hereof: Provided, That if the gross income from unrelated
trade, business or other activity exceeds fifty percent (50%) of
the total gross income derived by such educational institutions
or hospitals from all sources, the tax prescribed in Subsection
(A) hereof shall be imposed on the entire taxable income. For
purposes of this Subsection, the term unrelated trade, business
or other activity means any trade, business or other activity,
the conduct of which is not substantially related to the exercise
or performance by such educational institution or hospital of its
primary purpose or function. A proprietary educational
institution is any private school maintained and
administered by private individuals or groups with an
issued permit to operate from the Department of Education,
Culture and Sports (DECS), or the Commission on Higher
Education (CHED), or the Technical Education and Skills
Development Authority (TESDA), as the case may be, in
accordance with existing laws and regulations. (Emphasis
supplied)
In comparison, Section 30(E) and Section 30(G) state:
Sec. 30. Exemptions from Tax on Corporations. The
following organizations shall not be taxed under this Title in
respect to income received by them as such:
xxxx
(E) Nonstock corporation or association organized and
operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset shall belong to or
inure to the benefit of any member, organizer, officer or any
specific person;
xxxx
(G) Civic League or organization not organized for profit
but operated exclusively for the promotion of social
welfare
xxxx
Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and character of
the foregoing organizations from any of their properties,
real or personal, or from any of their activities conducted
for profit regardless of the disposition of such income,
shall be subject to tax imposed under this Code.
(Emphasis supplied)
CASE DIGEST
Facts:
St. Lukes Medical Center, Inc. (St. Lukes) is a hospital organized
as a non-stock and non-profit corporation.
The BIR assessed St. Lukes deficiency taxes for 1998 comprised
of deficiency income tax, value-added tax, and withholding tax.
The BIR claimed that St. Lukes should be liable for income tax
at a preferential rate of 10% as provided for by Section 27(B).
Further, the BIR claimed that St. Lukes was actually operating
for profit in 1998 because only 13% of its revenues came from
charitable purposes. Moreover, the hospitals board of trustees,
officers and employees directly benefit from its profits and
assets.
On the other hand, St. Lukes maintained that it is a non-stock
and non-profit institution for charitable and social welfare
purposes exempt from income tax under Section 30(E) and (G)
of the NIRC. It argued that the making of profit per se does not
destroy its income tax exemption.
Issue:
The sole issue is whether St. Lukes is liable for
deficiency income tax in 1998 under Section 27(B) of the NIRC,
which imposes a preferential tax rate of 10^ on the income of
proprietary non-profit hospitals.
Ruling:
Section 27(B) of the NIRC does not remove the income
tax exemption of proprietary non-profit hospitals under Section
19
30(E) and (G). Section 27(B) on one hand, and Section 30(E) and
(G) on the other hand, can be construed together without
the removal of such tax exemption.
Section 27(B) of the NIRC imposes a 10% preferential tax rate on
the income of (1) proprietary non-profit educational
institutions and (2) proprietary non-profit hospitals. The
only qualifications for hospitals are that they must be
proprietary and non-profit. Proprietary means private,
following the definition of a proprietary educational institution
as any private school maintained and administered by
private individuals or groups with a government permit.
Non-profit means no net income or asset accrues to or
benefits any member or specific person, with all the net
income or asset devoted to the institutions purposes and all its
activities conducted not for profit.
Non-profit does not necessarily mean charitable. In
Collector of Internal Revenue v. Club Filipino Inc. de Cebu, this
Court considered as non-profit a sports club organized for
recreation and entertainment of its stockholders and members.
The club was primarily funded by membership fees and dues. If
it had profits, they were used for overhead expenses and
improving its golf course. The club was non-profit because of its
purpose and there was no evidence that it was engaged in
a profit-making enterprise.
The sports club in Club Filipino Inc. de Cebu may be non-profit,
but it was not charitable. The Court defined charity in Lung
Center of the Philippines v. Quezon City as a gift, to be
applied consistently with existing laws, for the benefit of an
indefinite number of persons, either by bringing their minds and
hearts under the influence of education or religion, by assisting
them to establish themselves in life or [by] otherwise lessening
the burden of government. However, despite its being a tax
exempt institution, any income such institution earns from
activities conducted for profit is taxable, as expressly provided
in the last paragraph of Sec. 30.
To be a charitable institution, however, an organization must
meet the substantive test of charity in Lung Center. The
issue in Lung Center concerns exemption from real property
tax and not income tax. However, it provides for the test of
charity in our jurisdiction. Charity is essentially a gift to an
indefinite number of persons which lessens the burden of
government. In other words, charitable institutions
provide for free goods and services to the public which
would otherwise fall on the shoulders of government.
Thus, as a matter of efficiency, the government forgoes taxes
which should have been spent to address public needs,
because certain private entities already assume a part of the
burden. This is the rationale for the tax exemption of
charitable institutions. The loss of taxes by the government
is compensated by its relief from doing public works which
would have been funded by appropriations from the Treasury
The Constitution exempts charitable institutions only from
real property taxes. In the NIRC, Congress decided to extend
the exemption to income taxes. However, the way Congress
crafted Section 30(E) of the NIRC is materially different from
Section 28(3), Article VI of the Constitution. (Emphasis
supplied)
Section 30(E) of the NIRC defines the corporation or association
that is exempt from income tax. On the other hand, Section
28(3), Article VI of the Constitution does not define a charitable
institution, but requires that the institution actually, directly
and exclusively use the property for a charitable purpose.
(Emphasis supplied)
To be exempt from real property taxes, Section 28(3), Article
VI of the Constitution requires that a charitable institution use
the property actually, directly and exclusively for charitable
purposes. (Emphasis supplied)
To be exempt from income taxes, Section 30(E) of the NIRC
requires that a charitable institution must be organized
and operated exclusively for charitable purposes. Likewise, to
be exempt from income taxes, Section 30(G) of the NIRC
requires that the institution be operated exclusively for social
welfare. (Emphasis supplied)
However, the last paragraph of Section 30 of the NIRC qualifies
the words organized and operated exclusively by providing
that:
Notwithstanding the provisions in the preceding paragraphs, the
income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal,
or from any of their activities conducted for profit
regardless of the disposition made of such income,
shall be subject to tax imposed under this Code.
(Emphasis supplied)
In short, the last paragraph of Section 30 provides that if a tax
exempt charitable institution conducts any activity for profit,
such activity is not tax exempt even as its not-for-profit
activities remain tax exempt.
Thus, even if the charitable institution must be organized and
operated exclusively for charitable purposes, it is nevertheless
allowed to engage in activities conducted for profit without
losing its tax exempt status for its not-for-profit activities. The
only consequence is that the income of whatever kind and
character of a charitable institution from any of its
activities conducted for profit, regardless of the disposition
made of such income, shall be subject to tax. Prior to the
introduction of Section 27(B), the tax rate on such income from
for-profit activities was the ordinary corporate rate under
Section 27(A). With the introduction of Section 27(B), the tax
rate is now 10%. (Emphasis supplied)
The Court finds that St. Lukes is a corporation that is not
operated exclusively for charitable or social welfare purposes
insofar as its revenues from paying patients are concerned. This
ruling is based not only on a strict interpretation of a provision
granting tax exemption, but also on the clear and plain text of
Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires
that an institution be operated exclusively for charitable or
social welfare purposes to be completely exempt from income
tax. An institution under Section 30(E) or (G) does not
lose its tax exemption if it earns income from its for-
profit activities. Such income from for-profit activities, under
the last paragraph of Section 30, is merely subject to income
tax, previously at the ordinary corporate rate but now at the
preferential 10% rate pursuant to Section 27(B).
(Emphasis supplied)
St. Lukes fails to meet the requirements under Section 30(E)
and (G) of the NIRC to be completely tax exempt from all its
income. However, it remains a proprietary non-profit hospital
under Section 27(B) of the NIRC as long as it does not distribute
any of its profits to its members and such profits are reinvested
pursuant to its corporate purposes. St. Lukes, as a proprietary
non-profit hospital, is entitled to the preferential tax rate of 10%
on its net income from its for-profit activities.
St. Lukes is therefore liable for deficiency income tax in 1998
under Section 27(B) of the NIRC. However, St. Lukes has good
reasons to rely on the letter dated 6 June 1990 by the BIR, which
opined that St. Lukes is a corporation for purely charitable and
social welfare purposes and thus exempt from income tax.
In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue,
the Court said that good faith and honest belief that one is not
subject to tax on the basis of previous interpretation of
government agencies tasked to implement the tax law, are
sufficient justification to delete the imposition of surcharges and
interest.
WHEREFORE, St. Lukes Medical Center, Inc. is ORDERED TO
PAY the deficiency income tax in 1998 based on the 10%
preferential income tax rate under Section 27(8) of the
National Internal Revenue Code. However, it is not liable for
surcharges and interest on such deficiency income tax
under Sections 248 and 249 of the National Internal
Revenue Code. All other parts of the Decision and
Resolution of the Court of Tax Appeals are AFFIRMED.
JOHN HAY PEOPLES ALTERNATIVE COALITION, MATEO
CARIO FOUNDATION INC., CENTER FORALTERNATIVE
SYSTEMS FOUNDATION INC., REGINA VICTORIA A.
BENAFIN REPRESENTED AND JOINEDBY HER MOTHER
MRS. ELISA BENAFIN, IZABEL M. LUYK REPRESENTED AND
JOINED BY HER MOTHERMRS. REBECCA MOLINA LUYK,
KATHERINE PE REPRESENTED AND JOINED BY HER
MOTHER ROSEMARIEG. PE, SOLEDAD S. CAMILO, ALICIA
C. PACALSO ALIAS "KEVAB," BETTY I. STRASSER, RUBY C.
GIRON,URSULA C. PEREZ ALIAS "BA-YAY," EDILBERTO T.
CLARAVALL, CARMEN CAROMINA, LILIA G.
YARANON,DIANE MONDOC, petitioners, vs. VICTOR LIM,
PRESIDENT, BASES CONVERSION
DEVELOPMENTAUTHORITY; JOHN HAY PORO POINT
DEVELOPMENT CORPORATION, CITY OF BAGUIO, TUNTEX
(B.V.I.)CO. LTD., ASIAWORLD INTERNATIONALE GROUP,
INC., DEPARTMENT OF ENVIRONMENT AND
NATURALRESOURCES, respondents.
Facts:
20
 The controversy stemmed from the issuance of Proclamation
No. 420 by then President Ramos declaring a portion of Camp
John Hay as a Special Economic Zone (SEZ) and creating a
regime of tax exemption within the John Hay Special Economic
Zone. In the present petition, petitioners assailed the
constitutionality of the proclamation.
Issue:
Whether Proclamation No. 420 is constitutional by providing for
national and local tax exemption within and granting other
economic incentives to the John Hay Special Economic Zone.
Held:
The Provisions of Proclamation No. 420 which provide for
national and local tax exemption within and granting other
economic incentives to the John Hay Special Economic Zone is
unconstitutional. It is the legislature, unless limited by a
provision of the Constitution, that has the full power to exempt
any person or corporation or class of property from taxation, its
power to exempt being as broad as its power to tax. Other than
Congress, the Constitution may itself provide for specific tax
exemptions, or local governments may pass ordinances on
exemption only from local taxes. The challenged grant of tax
exemption would circumvent the Constitution's imposition that a
law granting any tax exemption must have the concurrence of a
majority of all the members of Congress. Moreover, the claimed
statutory exemption of the John Hay SEZ from taxation should
be manifest and unmistakable from the language of the law on
which it is based; it must be expressly granted in a statute
stated in a language too clear to be mistaken. Tax exemption
cannot be implied as it must be categorically and unmistakenly
expressed. If it were the intent of the legislature to grant to the
John Hay SEZ the same tax exemption and incentives given to
the Subic SEZ, it would have so expressly provided in the R.A.
7227. Thus, the Court declared that the grant by Proclamation
No. 420 of tax exemption and other privileges to the John Hay
SEZ was void for being violative of the Constitution.
Commissioner on Internal Revenue V. Court of Tax
Appeals and Manila Golf and Country Club GR No. 47421,
May 14, 1990
FACTS:
In Commissioner of Internal Revenue V. Manila Hotel
Corporation, SC overruled Court of Tax Appeals decision that
caterers tax under RA 6110 is illegal because it was vetoed by
Former President Marcos and Congress had not taken steps to
override the veto. SC ruled in this case that the law has always
imposed a 3% caterers tax, as provided in Par 1, Sec 206 of the
Tax Code.
Manila Golf & Country Club, Inc., a non-stock corporation who
maintains a golf course and operates a clubhouse with a lounge,
bar &dining room exclusively for its members & guests claims
that they should have been exempt from payment of privilege
taxes were it not for the last paragraph of Section 191-A of RA
No. 6110, otherwise known as "Omnibus Tax Law". By virtue of
RA No. 6110, the CIR assessed the Manila Golf and Country Club
fixed taxes as operators of golf links and restaurant, and also
percentage tax (caterer's tax) for its sale of foods and fermented
liquors/wines for the period covering September 1969 to
December 1970 in the amount of P32,504.96 in which the club
protested claiming the assessment to be without basis because
Section 42 was vetoed by then President Marcos. President
Marcos vetoed Sec 191-A because according to him it would 1)
shift the burden of taxation to the consuming public and 2)
restrain the development of hotels which are essential to the
tourist industry. CIR denied the protestation of the club, who
maintain that Section 42was not entirely vetoed but merely the
words "hotel, motels, resthouses" on the ground that it might
restrain the development of hotels which is essential to the
tourism industry.
ISSUE:
Whether or not the presidential veto referred to the entire
section or merely to the imposition of 20% tax on gross receipt
of operators or proprietors of restaurants, refreshment parlors,
bars and other eatingplaces which are maintained within the
premises or compound of a hotel, motel or resthouses.
HELD:
President does not have the power to repeal an existing tax.
Therefore, he could not have repealed the 3% caterers tax.
CTA agreed with respondent club that president vetoed only a
certain part. CTA mentioned that President can veto only an
entire item, and not just words. SC held that the President
intentionally only vetoed a few words in Sec 191-A. Assuming
that the veto could not apply to just one provision but all would
render the Presidential veto void and still in favor of petitioner.
Inclusion of hotels, motels, resthouses in the 20% caterers tax
bracket are items. President has the right to veto such item,
that which is subject to tax and tax rate. It does not refer to an
entire section. To construe item as an entire section would be to
tie his hands to either completely agree with a section he has
objections with or to disagree with an entire section where he
only has a portion he disagrees with. It was then agreed by the
SC with then Solicitor General Estelito Mendoza and his
associates that inclusion of hotels, motels, and rest houses in
the 20% caterer's tax bracket are "items" in themselves within
the meaning of Sec. 20(3), Article VI of the 1935Constitution.
The Petition is granted. Sec. 191-A of RA 6110 is valid and
enforceable, hence the Manila Golf and Country Club, Inc is
liable for the amount assessed against it.
Southern Cross Cement Corporation v. Cement
Manufacturers Association of the Philippines, G.R. No.
158540, 3 August 2005
Cement is hardly an exciting subject for litigation. Still, the
parties in this case have done their best to put up a spirited
advocacy of their respective positions, throwing in everything
including the proverbial kitchen sink. At present, the burden of
passion, if not proof, has shifted to public respondents
Department of Trade and Industry (DTI) and private respondent
Philippine Cement Manufacturers Corporation (Philcemcor),[1]
who now seek reconsideration of our Decision dated 8 July 2004
(Decision), which granted the petition of petitioner Southern
Cross Cement Corporation (Southern Cross).
This case, of course, is ultimately not just about cement. For
respondents, it is about love of country and the future of the
domestic industry in the face of foreign competition. For this
Court, it is about elementary statutory construction,
constitutional limitations on the executive power to impose
tariffs and similar measures, and obedience to the law. Just as
much was asserted in the Decision, and the same holds true
with this present Resolution.
POWER OF PRESIDENT TO IMPOSE TARIFF RATES: Without
Section 28(2), Article VI, the executive branch has no authority
to impose tariffs and other similar tax levies involving the
importation of foreign goods. Assuming that Section 28(2)
Article VI did not exist, the enactment of the SMA by Congress
would be voided on the ground that it would constitute an undue
delegation of the legislative power to tax. The constitutional
provision shields such delegation from constitutional infirmity,
and should be recognized as an exceptional grant of legislative
power to the President, rather than the affirmation of an
inherent executive power.
QUALIFIERS: This being the case, the qualifiers mandated by the
Constitution on this presidential authority attain primordial
consideration: (1) there must be a law; (2) there must be
specified limits; and (3) Congress may impose limitations and
restrictions on this presidential authority.
POWER EXERCISED BY ALTER EGOS OF PRES: The Court
recognizes that the authority delegated to the President under
Section 28(2), Article VI may be exercised, in accordance with
legislative sanction, by the alter egos of the President, such as
department secretaries. Indeed, for purposes of the Presidents
exercise of power to impose tariffs under Article VI, Section
28(2), it is generally the Secretary of Finance who acts as alter
ego of the President. The SMA provides an exceptional instance
wherein it is the DTI or Agriculture Secretary who is tasked by
Congress, in their capacities as alter egos of the President, to
impose such measures. Certainly, the DTI Secretary has no
21
inherent power, even as alter ego of the President, to levy tariffs
and imports.
TARIFF COMMISSION AND DTI SEC ARE AGENTS: Concurrently,
the tasking of the Tariff Commission under the SMA should be
likewise construed within the same context as part and parcel of
the legislative delegation of its inherent power to impose tariffs
and imposts to the executive branch, subject to limitations and
restrictions. In that regard, both the Tariff Commission and the
DTI Secretary may be regarded as agents of Congress within
their limited respective spheres, as ordained in the SMA, in the
implementation of the said law which significantly draws its
strength from the plenary legislative power of taxation. Indeed,
even the President may be considered as an agent of Congress
for the purpose of imposing safeguard measures. It is Congress,
not the President, which possesses inherent powers to impose
tariffs and imposts. Without legislative authorization through
statute, the President has no power, authority or right to impose
such safeguard measures because taxation is inherently
legislative, not executive.
When Congress tasks the President or his/her alter egos to
impose safeguard measures under the delineated conditions,
the President or the alter egos may be properly deemed as
agents of Congress to perform an act that inherently belongs as
a matter of right to the legislature. It is basic agency law that
the agent may not act beyond the specifically delegated powers
or disregard the restrictions imposed by the principal. In short,
Congress may establish the procedural framework under which
such safeguard measures may be imposed, and assign the
various offices in the government bureaucracy respective tasks
pursuant to the imposition of such measures, the task
assignment including the factual determination of whether the
necessary conditions exists to warrant such impositions. Under
the SMA, Congress assigned the DTI Secretary and the Tariff
Commission their respective functions in the legislatures
scheme of things.
There is only one viable ground for challenging the legality of
the limitations and restrictions imposed by Congress under
Section 28(2) Article VI, and that is such limitations and
restrictions are themselves violative of the Constitution. Thus,
no matter how distasteful or noxious these limitations and
restrictions may seem, the Court has no choice but to uphold
their validity unless their constitutional infirmity can be
demonstrated.
What are these limitations and restrictions that are material to
the present case? The entire SMA provides for a limited
framework under which the President, through the DTI and
Agriculture Secretaries, may impose safeguard measures in the
form of tariffs and similar imposts.
POWER BELONGS TO CONGRESS: the cited passage from Fr.
Bernas actually states, Since the Constitution has given the
President the power of control, with all its awesome implications,
it is the Constitution alone which can curtail such power. Does
the President have such tariff powers under the Constitution in
the first place which may be curtailed by the executive power of
control? At the risk of redundancy, we quote Section 28(2),
Article VI: The Congress may, by law, authorize the President to
fix within specified limits, and subject to such limitations and
restrictions as it may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other duties or imposts
within the framework of the national development program of
the Government. Clearly the power to impose tariffs belongs to
Congress and not to the President.
American Bible Society v. City of Manila, G.R. No. L-9637,
30 April 1957
Facts:
American Bible Society (ABS) is a foreign, non-stock,
non-profit, religious, missionary corporation, which in the course
of its ministry has been distributing and selling bibles and/or
gospel portions thereof throughout the Philippines and
translating the same into several Philippine dialects. The City
Treasurer of the City of Manila considered ABS to be conducting
the business of general merchandise, and pursuant to
ordinances of the City of Manila, Nos. 3000, as amended, and
2529, 3028 and 3364, required ABS to secure business permit
and license fees , together with compromise in the total sum of
P5,821.45. ABS paid said amount under protest, however, it
assailed the validity of the aforementioned municipal
ordinances, contending that these ordinances provide for
religious censorship and restrain the free exercise and
enjoyment of its religious profession, to wit: the distribution and
sale of bibles and other religious literature to the people of the
Philippines.
Issues:
Whether said ordinances are inapplicable, invalid or
unconstitutional if applied to the alleged business of distribution
and sale of bibles to the people of the Philippines by a religious
corporation like the American Bible Society.
Ruling:
The ordinances are inapplicable to ABS business, trade
or occupation. The City of Manila is powerless to license or tax
the business of plaintiff ABS involved herein because it would
impair ABS right to the free exercise and enjoyment of its
religious profession and worship, as well as its right of
dissemination of religious beliefs.
Section 1, subsection (7) of Article III of the Constitution of the
Republic of the Philippines, provides that:
(7) No law shall be made respecting an establishment of
religion, or prohibiting the free exercise thereof, and the free
exercise and enjoyment of religious profession and worship,
without discrimination or preference, shall forever be allowed.
No religion test shall be required for the exercise of civil or
political rights.
Article III, section 1, clause (7) of the Constitution of the
Philippines aforequoted, guarantees the freedom of religious
profession and worship. The constitutional guaranty of the free
exercise and enjoyment of religious profession and worship
carries with it the right to disseminate religious information. Any
restraints of such right can only be justified like other restraints
of freedom of expression on the grounds that there is a clear
and present danger of any substantive evil which the State has
the right to prevent". (Taada and Fernando on the Constitution
of the Philippines, Vol. 1, 4th ed., p. 297).
What is involved here is a license tax a flat tax imposed on
the exercise of a privilege granted by the Bill of Rights. The
power to impose a license tax on the exercise of these freedom
is indeed as potent as the power of censorship which this Court
has repeatedly struck down. It is not a nominal fee imposed as
a regulatory measure to defray the expenses of policing the
activities in question. It is in no way apportioned. It is flat license
tax levied and collected as a condition to the pursuit of activities
whose enjoyment is guaranteed by the constitutional liberties of
press and religion and inevitably tends to suppress their
exercise. That is almost uniformly recognized as the inherent
vice and evil of this flat license tax.
The dissemination of religious information cannot be conditioned
upon the approval of an official. The right to enjoy freedom of
the press and religion occupies a preferred position as against
the constitutional right of property owners.
It may be true that in the case at bar the price asked for the
bibles and other religious pamphlets was in some instances a
little bit higher than the actual cost of the same but this cannot
mean that appellant was engaged in the business or occupation
of selling said "merchandise" for profit.
Tolentino v. Secretary of Finance, G.R. No. 115455, 30
October 1995
FACTS:
Herein various petitioners seek to declare RA 7166 as
unconstitutional as it seeks to widen the tax base of the existing
VAT system and enhance its administration by amending the
National Internal Revenue Code. The value-added tax (VAT) is
levied on the sale, barter or exchange of goods and properties
as well as on the sale or exchange of services. It is equivalent to
10% of the gross selling price or gross value in money of goods
or properties sold, bartered or exchanged or of the gross
receipts from the sale or exchange of services.
22
CREBA asserts that R.A. No. 7716 (1) impairs the obligations of by the Constitution to local government units to create their own
contracts, (2) classifies transactions as covered or exempt sources of revenue.
without reasonable basis and (3) violates the rule that taxes
should be uniform and equitable and that Congress shall "evolve
a progressive system of taxation."

ISSUE:
ISSUE:

Whether or not RA 7166 violates the principle of progressive

system of taxation.
Whether Smart is liable to pay the franchise tax imposed by the
City of Davao.
HELD:

No, there is no justification for passing upon the claims that the
law also violates the rule that taxation must be progressive and
that it denies petitioners' right to due process and that equal RULING:
protection of the laws. The reason for this different treatment
has been cogently stated by an eminent authority on
constitutional law thus: "When freedom of the mind is imperiled
by law, it is freedom that commands a momentum of respect;
Prospective Effect of R.A. No. 7160
when property is imperiled it is the lawmakers' judgment that
commands respect. This dual standard may not precisely
reverse the presumption of constitutionality in civil liberties
cases, but obviously it does set up a hierarchy of values within
the due process clause." On March 27, 1992, Smarts legislative franchise (R.A. No. 7294)
took effect. Section 9 thereof, quoted hereunder, is at the heart
The claim of the Philippine Press Institute, petitioner in G.R. No. of the present controversy:
115544, that the VAT will drive some of its members out of
circulation because their profits from advertisements will not be
enough to pay for their tax liability, while purporting to be based
on the financial statements of the newspapers in question, still
falls short of the establishment of facts by evidence so Section 9. Tax provisions. The grantee, its successors or
necessary for adjudicating the question whether the tax is assigns shall be liable to pay the same taxes on their real estate
oppressive and confiscatory. buildings and personal property, exclusive of' this franchise, as
other persons or corporations which are now or hereafter may
be required by law to pay. In addition thereto, the grantee, its
Indeed, regressivity is not a negative standard for courts to successors or assigns shall pay a franchise tax equivalent to
enforce. What Congress is required by the Constitution to do is three percent (3%) of all gross receipts of the business
to "evolve a progressive system of taxation." This is a directive transacted under this franchise by the grantee, its successors or
to Congress, just like the directive to it to give priority to the assigns and the said percentage shall be in lieu of all taxes on
enactment of laws for the enhancement of human dignity and this franchise or earnings thereof: Provided, That the grantee, its
the reduction of social, economic and political inequalities (Art. successors or assigns shall continue to be liable for income
XIII, 1), or for the promotion of the right to "quality education" taxes payable under Title II of the National Internal Revenue
(Art. XIV, 1). These provisions are put in the Constitution as Code pursuant to Section 2 of Executive Order No. 72 unless the
moral incentives to legislation, not as judicially enforceable latter enactment is amended or repealed, in which case the
rights. amendment or repeal shall be applicable thereto.

Smart Communications v. The City of Davao, G.R. No.

155491, 16 September 2008

Smart alleges that the "in lieu of all taxes" clause in Section 9 of
G.R. No. 155491 its franchise exempts it from all taxes, both local and national,
except the national franchise tax (now VAT), income tax, and
FACTS: real property tax.

Smart contends that its telecenter in Davao City is exempt from
payment of franchise tax to the City, on the following grounds:
(a) the issuance of its franchise under Republic Act (R.A.) No.
72945 subsequent to R.A. No. 7160 shows the clear legislative
intent to exempt it from the provisions of R.A. 7160;
On January 1, 1992, two months ahead of Smarts franchise, the
Local Government Code (R.A. No. 7160) took effect. Section 137,
in relation to Section 151 of R.A. No. 7160, allowed the
imposition of franchise tax by the local government units; while
Section 193 thereof provided for the withdrawal of tax
exemption privileges granted prior to the issuance of R.A. No.
7160 except for those expressly mentioned therein, viz.:

(b) Section 137 of R.A. No. 7160 can only apply to exemptions
already existing at the time of its effectivity and not to future
exemptions;
Section 137. Franchise Tax. Notwithstanding any exemption
granted by any law or other special law, the province may
(c) the power of the City of Davao to impose a franchise tax is
impose a tax on businesses enjoying a franchise, at the rate not
subject to statutory limitations such as the "in lieu of all taxes"
exceeding fifty percent (50%) of one percent (1%) of the gross
clause found in Section 9 of R.A. No. 7294; and
annual receipts for the preceding calendar year based on the
incoming receipt, or realized, within its territorial jurisdiction.
(d) the imposition of franchise tax by the City of Davao would
amount to a violation of the constitutional provision against
impairment of contracts.7

Section 151. Scope of Taxing Powers. Except as otherwise

Respondents filed their Answer in which they contested the tax
exemption claimed by Smart. They invoked the power granted
provided in this Code, the city may levy the taxes, fees, and
charges which the province or municipality may impose:
Provided, however, That the taxes, fees and charges levied and
23
collected by highly urbanized and independent component cities
shall accrue to them and distributed in accordance with the
provisions of this Code.
Section 193. Withdrawal of Tax Exemption Privileges. Unless
otherwise provided in this Code, tax exemptions or incentives
granted to, or presently enjoyed by all persons, whether natural
or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly
registered under RA No. 6938, non-stock and non-profit hospitals
and educational institutions, are hereby withdrawn upon the
effectivity of this Code. (Emphasis supplied.)
Smart argues that it is not covered by Section 137, in relation to
Section 151 of R.A. No. 7160, because its franchise was granted
after the effectivity of the said law.
We agree with Smarts contention on this matter. The
withdrawal of tax exemptions or incentives provided in R.A. No.
7160 can only affect those franchises granted prior to the
effectivity of the law. The intention of the legislature to remove
all tax exemptions or incentives granted prior to the said law is
evident in the language of Section 193 of R.A. No. 7160. No
interpretation is necessary.
The "in lieu of all taxes" Clause in R.A. No. 7294
Smart is of the view that the only taxes it may be made to bear
under its franchise are the national franchise tax (now VAT),
income tax, and real property tax. It claims exemption from the
local franchise tax because the "in lieu of taxes" clause in its
franchise does not distinguish between national and local taxes.
We pay heed that R.A. No. 7294 is not definite in granting
exemption to Smart from local taxation. Section 9 of R.A. No.
7294 imposes on Smart a franchise tax equivalent to three
percent (3%) of all gross receipts of the business transacted
under the franchise and the said percentage shall be in lieu of
all taxes on the franchise or earnings thereof. R.A. No 7294 does
not expressly provide what kind of taxes Smart is exempted
from. It is not clear whether the "in lieu of all taxes" provision in
the franchise of Smart would include exemption from local or
national taxation. What is clear is that Smart shall pay franchise
tax equivalent to three percent (3%) of all gross receipts of the
business transacted under its franchise. But whether the
franchise tax exemption would include exemption from
exactions by both the local and the national government is not
unequivocal.
The uncertainty in the "in lieu of all taxes" clause in R.A. No.
7294 on whether Smart is exempted from both local and
national franchise tax must be construed strictly against Smart
which claims the exemption. Smart has the burden of proving
that, aside from the imposed 3% franchise tax, Congress
intended it to be exempt from all kinds of franchise taxes
whether local or national. However, Smart failed in this regard.
Tax exemptions are never presumed and are strictly construed
against the taxpayer and liberally in favor of the taxing
authority.
In this case, the doubt must be resolved in favor of the City of
Davao. The "in lieu of all taxes" clause applies only to national
internal revenue taxes and not to local taxes. As appropriately
pointed out in the separate opinion of Justice Antonio T. Carpio
in a similar case involving a demand for exemption from local
franchise taxes:
[T]he "in lieu of all taxes" clause in Smart's franchise refers only
to taxes, other than income tax, imposed under the National
Internal Revenue Code. The "in lieu of all taxes" clause does not
apply to local taxes. The proviso in the first paragraph of Section
9 of Smart's franchise states that the grantee shall "continue to
be liable for income taxes payable under Title II of the National
Internal Revenue Code." Also, the second paragraph of Section 9
speaks of tax returns filed and taxes paid to the "Commissioner
of Internal Revenue or his duly authorized representative in
accordance with the National Internal Revenue Code." Moreover,
the same paragraph declares that the tax returns "shall be
subject to audit by the Bureau of Internal Revenue." Nothing is
mentioned in Section 9 about local taxes. The clear intent is for
the "in lieu of all taxes" clause to apply only to taxes under the
National Internal Revenue Code and not to local taxes. Even with
respect to national internal revenue taxes, the "in lieu of all
taxes" clause does not apply to income tax.
NOTA BENE:
It should be noted that the "in lieu of all taxes" clause in R.A. No.
7294 has become functus officio with the abolition of the
franchise tax on telecommunications companies. As admitted by
Smart in its pleadings, it is no longer paying the 3% franchise
tax mandated in its franchise. Currently, Smart along with other
telecommunications companies pays the uniform 10% value-
added tax.
Tax Exclusion/Tax Exemption
Smart gives another perspective of the "in lieu of all taxes"
clause in Section 9 of R.A. No. 7294 in order to avoid the
payment of local franchise tax. It says that, viewed from another
angle, the "in lieu of all taxes" clause partakes of the nature of a
tax exclusion and not a tax exemption. A tax exemption means
that the taxpayer does not pay any tax at all. Smart pays VAT,
income tax, and real property tax. Thus, what it enjoys is more
accurately a tax exclusion.
However, as previously held by the Court, both in their nature
and effect, there is no essential difference between a tax
exemption and a tax exclusion. An exemption is an immunity or
a privilege; it is the freedom from a charge or burden to which
others are subjected. An exclusion, on the other hand, is the
removal of otherwise taxable items from the reach of taxation,
e.g., exclusions from gross income and allowable deductions. An
exclusion is, thus, also an immunity or privilege which frees a
taxpayer from a charge to which others are subjected.
Consequently, the rule that a tax exemption should be applied
in strictissimi juris against the taxpayer and liberally in favor of
the government applies equally to tax exclusions.
Non-impairment Clause of the Constitution
24
Another argument of Smart is that the imposition of the local
franchise tax by the City of Davao would violate the
constitutional prohibition against impairment of contracts. The
franchise, according to petitioner, is in the nature of a contract
between the government and Smart.
However, we find that there is no violation of Article III, Section
10 of the 1987 Philippine Constitution. As previously discussed,
the franchise of Smart does not expressly provide for exemption
from local taxes. Absent the express provision on such
exemption under the franchise, we are constrained to rule
against it. The "in lieu of all taxes" clause in Section 9 of R.A. No.
7294 leaves much room for interpretation. Due to this ambiguity
in the law, the doubt must be resolved against the grant of tax
exemption.
Moreover, Smarts franchise was granted with the express
condition that it is subject to amendment, alteration, or repeal.
3rd Batch of Cases
EVANGELISTA vs. THE COLLECTOR OF INTERNAL
REVENUE and THE COURT OF TAX APPEALS,
G.R. No. L-9996
FACTS:
This is a petition, filed by Eufemia Evangelista, Manuela
Evangelista and Francisca Evangelista, for review of a decision
of the Court of Tax Appeals
That the petitioners borrowed from their father the sum of
P59,140.00 which amount together with their personal monies
was used by them for the purpose of buying real properties.
That on February 2, 1943 they bought from Mrs. Josefina
Florentino a lot with an area of 3,713.40 sq. m. including
improvements thereon for the sum of P100,000.00; this property
has an assessed value of P57,517.00 as of 1948. That on April 3,
1944 they purchased from Mrs. Josefa Oppus 21 parcels of land
with an aggregate area of 3,718.40 sq. m. including
improvements thereon for P18,000.00; this property has an
assessed value of P8,255.00 as of 1948. That on April 23, 1944
they purchased from the Insular Investments, Inc., a lot of 4,358
sq. m. including improvements thereon for P108,825.00. This
property has an assessed value of P4,983.00 as of 1943. That on
April 28, 1944 they bought from Mrs. Valentin Afable a lot of
8,371 sq. m. including improvements thereon for P237,234.14.
This property has an assessed value of P59,140.00 as of 1948.
That in a document dated August 16, 1945, they appointed their
brother Simeon Evangelista to 'manage their properties with full
power to lease; to collect and receive rents; to issue receipts
therefor; in default of such payment, to bring suits against the
defaulting tenant; to sign all letters, contracts, etc., for and in
their behalf, and to endorse and deposit all notes and checks for
them.
That after having bought the above-mentioned real properties,
the petitioners had the same rented or leased to various tenants
wherein income were derive there from.
It further appears that on September 24, 1954, respondent
Collector of Internal Revenue demanded the payment of income
tax on corporations, real estate dealer's fixed tax and
corporation residence tax for the years 1945-1949, computed,
according to the assessments made by said officer. The TOTAL
TAXES DUE is P6,878.34.
Said letter of demand and the corresponding assessments were
delivered to petitioners on December 3, 1954, whereupon they
instituted the present case in the Court of Tax Appeals, with a
prayer that "the decision of the respondent contained in his
letter of demand dated September 24, 1954" be reversed, and
that they be absolved from the payment of the taxes in
question, with costs against the respondent.
After appropriate proceedings, the Court of Tax Appeals
rendered the above-mentioned decision for the respondent, and,
a petition for reconsideration and new trial having been
subsequently denied.
ISSUE:
The issue in this case is whether petitioners are subject to the
tax on corporations as well as to the residence tax for
corporations and the real estate dealers' fixed tax.
HELD:
TAXATION; TAX ON CORPORATIONS INCLUDES ORGANIZATION
WHICH ARE NOT NECESSARY PARTNERSHIP. "Corporations"
strictly speaking are distinct and different from "partnership".
When our Internal Revenue Code includes "partnership" among
the entities subject to the tax on "corporations", it must be
allude to organization which are not necessarily "partnership" in
the technical sense of the term.
As defined in section 84 (b) of the Internal Revenue Code "the
term corporation includes partnership, no matter how created or
organized." This qualifying expression clearly indicates that a
joint venture need not be undertaken in any of the standards
form, or conformity with the usual requirements of the law on
partnerships, in order that one could be deemed constituted for
the purposes of the tax on corporations.
CORPORATIONS INCLUDES "JOINT ACCOUNT" AND
ASSOCIATIONS WITHOUT LEGAL PERSONALITY. Pursuant to
Section 84 (b) of the Internal Revenue Code, the term
"corporations" includes, among the others, "joint accounts
(cuenta en participacion)" and "associations", none of which has
a legal personality of its own independent of that of its
members. For purposes of the tax on corporations, our National
Internal Revenue Code includes these partnership. with the
exception only of duly registered general partnership. within
the purview of the term "corporations." Held: That the
petitioners in the case at bar, who are engaged in real estate
transactions for monetary gain and divide the same among
themselves, constitute a partnership, so far as the said Code is
concerned, and are subject to the income tax for the
corporation.
CORPORATION; PARTNERSHIP WITHOUT LEGAL PERSONALITY
SUBJECT TO RESIDENCE TAX ON CORPORATION. The pertinent
part of the provision of Section 2 of Commonwealth Act No. 465
which says: "The term corporation as used in this Act includes
joint-stock company, partnership, joint account (cuentas en
participacion), association or insurance company, no matter how
created or organized." is analogous to that of Section 24 and 84
(b) of our Internal Revenue Code which was approved the day
immediately after the approval of said Commonwealth Act No.
565. Apparently, the terms "corporation" and "Partnership" are
used both statutes with substantially the same meaning, Held:
That the petitioners are subject to the residence tax
corporations.
Wherefore, the appealed decision of the Court of Tax Appeals is
hereby affirmed with costs against the petitioners herein. It is so
ordered
Afisco Insurance Corp., et al. vs. Court of Appeals, et al.,
G.R. No. 112675, January 25, 1999
FACTS:
The petitioners are 41 non-life domestic insurance corporations.
They issued risk insurance policies for machines. The petitioners
in 1965 entered into a Quota Share Reinsurance Treaty and a
Surplus Reinsurance Treaty with the Munchener
Ruckversicherungs-Gesselschaft (hereafter called Munich), a
non-resident foreign insurance corporation. The reinsurance
treaties required petitioners to form a pool, which they complied
with.
In 1976, the pool of machinery insurers submitted a financial
statement and filed an Information Return of Organization
Exempt from Income Tax for 1975. On the basis of this, the CIR
assessed a deficiency of P1,843,273.60, and withholding taxes
25
in the amount of P1,768,799.39 and P89,438.68 on dividends
paid to Munich and to the petitioners, respectively.
The Court of Tax Appeal sustained the petitioner's liability. The
Court of Appeals dismissed their appeal.
The CA ruled in that the pool of machinery insurers was a
partnership taxable as a corporation, and that the latters
collection of premiums on behalf of its members, the ceding
companies, was taxable income.
ISSUE/S:
Whether or not the pool is taxable as a corporation.
Whether or not there is double taxation.
HELD:
1) Yes: Pool taxable as a corporation
Argument of Petitioner: The reinsurance policies were written by
them individually and separately, and that their liability was
limited to the extent of their allocated share in the original risks
thus reinsured. Hence, the pool did not act or earn income as a
reinsurer. Its role was limited to its principal function of
allocating and distributing the risk(s) arising from the original
insurance among the signatories to the treaty or the members
of the pool based on their ability to absorb the risk(s) ceded[;]
as well as the performance of incidental functions, such as
records, maintenance, collection and custody of funds, etc.
Argument of SC: According to Section 24 of the NIRC of 1975:
SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic
corporations. -- A tax is hereby imposed upon the taxable net
income received during each taxable year from all sources by
every corporation organized in, or existing under the laws of the
Philippines, no matter how created or organized, but not
including duly registered general co-partnership (compaias
colectivas), general professional partnerships, private
educational institutions, and building and loan associations xxx.
Ineludibly, the Philippine legislature included in the concept of
corporations those entities that resembled them such as
unregistered partnerships and associations. Interestingly, the
NIRCs inclusion of such entities in the tax on corporations was
made even clearer by the Tax Reform Act of 1997 Sec. 27 read
together with Sec. 22 reads:
SEC. 27. Rates of Income Tax on Domestic Corporations. --
(A) In General. -- Except as otherwise provided in this Code, an
income tax of thirty-five percent (35%) is hereby imposed upon
the taxable income derived during each taxable year from all
sources within and without the Philippines by every corporation,
as defined in Section 22 (B) of this Code, and taxable under this
Title as a corporation xxx.
SEC. 22. -- Definition. -- When used in this Title:
xxx xxx xxx
(B) The term corporation shall include partnerships, no matter
how created or organized, joint-stock companies, joint accounts
(cuentas en participacion), associations, or insurance
companies, but does not include general professional
partnerships [or] a joint venture or consortium formed for the
purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations
pursuant to an operating or consortium agreement under a
service contract without the Government. General professional
partnerships are partnerships formed by persons for the sole
purpose of exercising their common profession, no part of the
income of which is derived from engaging in any trade or
business.
Thus, the Court in Evangelista v. Collector of Internal Revenue
held that Section 24 covered these unregistered partnerships
and even associations or joint accounts, which had no legal
personalities apart from their individual members.
Furthermore, Pool Agreement or an association that would
handle all the insurance businesses covered under their quota-
share reinsurance treaty and surplus reinsurance treaty with
Munich may be considered a partnership because it contains the
following elements: (1) The pool has a common fund, consisting
of money and other valuables that are deposited in the name
and credit of the pool. This common fund pays for the
administration and operation expenses of the pool. (2) The pool
functions through an executive board, which resembles the
board of directors of a corporation, composed of one
representative for each of the ceding companies. (3) While, the
pool itself is not a reinsurer and does not issue any policies; its
work is indispensable, beneficial and economically useful to the
business of the ceding companies and Munich, because without
it they would not have received their premiums pursuant to the
agreement with Munich. Profit motive or business is, therefore,
the primordial reason for the pools formation.
2) No: There is no double taxation.
Argument of Petitioner: Remittances of the pool to the ceding
companies and Munich are not dividends subject to tax.
Imposing a tax would be tantamount to an illegal double
taxation, as it would result in taxing the same premium income
twice in the hands of the same taxpayer. Furthermore, even if
such remittances were treated as dividends, they would have
been exempt under tSections 24 (b) (I) and 263 of the 1977
NIRC , as well as Article 7 of paragraph 1and Article 5 of
paragraph 5 of the RP-West German Tax Treaty.
Argument of Supreme Court: Double taxation means taxing the
same person twice by the same jurisdiction for the same thing.
In the instant case, the insurance pool is a taxable entity
distince from the individual corporate entities of the ceding
companies. The tax on its income is obviously different from the
tax on the dividends received by the companies. There is no
double taxation.
Tax exemption cannot be claimed by non-resident foreign
insurance corporattion; tax exemption construed strictly against
the taxpayer - Section 24 (b) (1) pertains to tax on foreign
corporations; hence, it cannot be claimed by the ceding
companies which are domestic corporations. Nor can Munich, a
foreign corporation, be granted exemption based solely on this
provision of the Tax Code because the same subsection
specifically taxes dividends, the type of remittances forwarded
to it by the pool. The foregoing interpretation of Section 24 (b)
(1) is in line with the doctrine that a tax exemption must be
construed strictissimi juris, and the statutory exemption claimed
must be expressed in a language too plain to be mistaken.
Wise & Co., Inc. vs. Bibiano L. Meer, G.R. No. 48231, June
30, 1947
Facts: On June 1, 1937, Manila Wine Merchants, Ltd., a
Hongkong company, was liquidated and its capital stock was
distributed to its stockholders, one of which is the petitioner. As
part of its liquidation, the corporation was sold to Manila Wine
Merchants., Inc. for Php400,000. The said earnings, declared as
dividends, were distributed to its stockholders.
The Hongkong company then paid the income tax for the entire
earnings. As a result of the sale of its business and assets, a
surplus was realized by the Hongkong company after deducting
the dividends. This surplus was also distributed to its
stockholders. The Hongkong company also paid the income tax
for the said surplus. The petitioners then filed their respective
income tax returns. The respondent Commissioner, then, made
a deficiency assessment charging the individual stockholders for
taxes on the shares distributed to them despite the fact that
income tax was already paid by the Hongkong company.
The petitioners paid the assessed amount in protest. The lower
courts ruled in favor of the Commissioner of Internal Revenue,
hence, this action.
ISSUES and RULINGS:
1.) Appellants contend that the amounts received by them
and on which the taxes in question were assessed and collected
were ordinary dividends; CIR contends that they were liquidating
dividends.
SC: The distributions under consideration were not ordinary
dividends. Therefore, they are taxable as liquidating dividends.
It was stipulated in the deed of sale that the sale and transfer of
the HK Co. shall take effect on June 1, 1937. Distribution took
place on June 8. They could not consistently deem all the
business and assets of the corporation sold as of June 1, 1937,
and still say that said corporation,as a going concern,distributed
ordinary dividends to them thereafter.
2.) Are such liquidating dividends taxable income?
SC: Income tax law states that Where a corporation,
partnership, association, joint-account, or insurance company
distributes all of its assets in complete liquidation or dissolution,
the gain realized or loss sustained by the stockholder, whether
individual or corporation, is a taxable income or a deductible
loss as the case may be. Appellants received the distributions
in question in exchange for the surrender and relinquishment by
them of their stock in the HK Co. which was dissolved and in
process of complete liquidation. That money in the hands of the
26
corporation formed a part of its income and was properly
taxable to it under the Income Tax Law. When the corporation
was dissolved and in process of complete liquidation and its
shareholders surrendered their stock to it and it paid the sums in
question to them in exchange, a transaction took place. The
shareholder who received the consideration for the stock earned
that much money as income of his own, which again was
properly taxable to him under the Income Tax Law.
3.) Non-resident alien individual appellants contend that if
the distributions received by them were to be considered as a
sale of their stock to the HK Co., the profit realized by them does
not constitute income from Philippine sources and is not subject
to Philippine taxes, "since all steps in the carrying out of this so-
called sale took place outside the Philippines."
SC: This contention is untenable. The HK Co. was at the
time of the sale of its business in the Philippines, and the PH Co.
was a domestic corporation domiciled and doing business also in
the Philippines. The HK Co. was incorporated for the purpose of
carrying on
in the Philippine Islands the business of wine, beer, and spirit
merchants and the other objects set out in its memorandum of
association. Hence, its earnings, profits, and assets, including
those from whose proceeds the distributions in question were
made, the major part of which consisted in the purchase price of
the business, had been earned and acquired in the Philippines.
As such, it is clear that said distributions were income "from
Philippine sources."
Commissioner of Internal Revenue vs. Juliane Baier-
Nickel, G.R. No. 153793, August 29, 2006
Facts:
CIR appeals the CA decision, which granted the tax refund of
respondent and reversed that of the CTA. Juliane Baier-Nickel, a
non-resident German, is the president of Jubanitex, a domestic
corporation engaged in the manufacturing, marketing and
selling of embroidered textile products. Through Jubanitexs
general manager, Marina Guzman, the company appointed
respondent as commission agent with 10% sales commission on
all sales actually concluded and collected through her efforts.
In 1995, respondent received P1, 707, 772. 64 as sales
commission from w/c Jubanitex deducted the 10% withholding
tax of P170, 777.26 and remitted to BIR. Respondent filed her
income tax return but then claimed a refund from BIR for the
P170K, alleging this was mistakenly withheld by Jubanitex and
that her sales commission income was compensation for
services rendered in Germany not Philippines and thus not
taxable here.
She filed a petition for review with CTA for alleged non-action by
BIR. CTA denied her claim but decision was reversed by CA on
appeal, holding that the commission was received as sales
agent not as President and that the source of income arose
from marketing activities in Germany.
Issue:
1. Whether or not respondents sales commission
income is taxable in the Philippines/
2. W/N respondent is entitled to refund
Held:
1. Yes. The settled rule is that tax refunds are in the
nature of tax exemptions and are to be construed strictissimi
juris against the taxpayer. To those therefore, who claim a
refund rest the burden of proving that the transaction subjected
to tax is actually exempt from taxation. The appointment letter
of respondent as agent of JUBANITEX stipulated that the activity
or the service which would entitle her to 10% commission
income, are "sales actually concluded and collected through
[her] efforts."
What she presented as evidence to prove that she performed
income producing activities abroad, were copies of documents
she allegedly faxed to JUBANITEX and bearing instructions as to
the sizes of, or designs and fabrics to be used in the finished
products as well as samples of sales orders purportedly relayed
to her by clients. In the instant case, respondent failed to give
substantial evidence to prove that she performed the incoming
producing service in Germany, which would have entitled her to
a tax exemption for income from sources outside the Philippines.
2. No. Pursuant to Sec 25 of NIRC, non-resident aliens,
whether or not engaged in trade or business, are subject to the
Philippine income taxation on their income received from all
sources in the Philippines. In determining the meaning of
source, the Court resorted to origin of Act 2833 (the first
Philippine income tax law), the US Revenue Law of 1916, as
amended in 1917.
US SC has said that income may be derived from three possible
sources only: (1) capital and/or (2) labor; and/or (3) the sale of
capital assets. If the income is from labor, the place where the
labor is done should be decisive; if it is done in this country, the
income should be from sources within the United States. If the
income is from capital, the place where the capital is employed
should be decisive; if it is employed in this country, the income
should be from sources within the United States. If the income
is from the sale of capital assets, the place where the sale is
made should be likewise decisive. Source is not a place, it is
an activity or property. As such, it has a situs or location, and if
that situs or location is within the United States the resulting
income is taxable to nonresident aliens and foreign
corporations.
The source of an income is the property, activity or service that
produced the income. For the source of income to be considered
as coming from the Philippines, it is sufficient that the income is
derived from activity within the Philippines.
RUFINO R. TAN VS. RAMON R. DEL ROSARIO, JR, ET AL.
GR NO. 109289, OCTOBER 3, 1994
FACTS:
Petitioner asserted that Republic Act No. 7496 violates the
following provisions of the Constitution:
Article VI, Section 26(1) Every bill passed by the Congress
shall embrace only one subject which shall be expressed in the
title thereof.
Article VI, Section 28(1) The rule of taxation shall be uniform
and equitable. The Congress shall evolve a progressive system
of taxation.
Article III, Section 1 No person shall be deprived of . . .
property without due process of law, nor shall any person be
denied the equal protection of the laws.
Further, petitioners, assailing Section 6 of Revenue Regulations
No. 2-93, argue that public respondents have exceeded their
rule-making authority in applying SNIT to general professional
partnerships.
ISSUE(S):
1. Whether or not Republic Act No. 7496 is unconstitutional.
2. Whether or not the public respondents exceeded their
authority in applying SNIT to partners in a general professional
partnership.
HELD:
1. The full text of the title reads: An Act Adopting the Simplified
Net Income Taxation (SNIT) Scheme For The Self-Employed and
Professionals Engaged In The Practice of Their Profession,
Amending Sections 21 and 29 of the National Internal Revenue
Code, as Amended.
It would be difficult to accept petitioner's view that the
amendatory law should be considered as having now adopted a
gross income, instead of as having still retained the net income,
taxation scheme. The allowance for deductible items, (Sec. 21
and 29 as amended) it is true, may have significantly been
reduced by the questioned law in comparison with that which
has prevailed prior to the amendment; limiting, however,
allowable deductions from gross income is neither discordant
with, nor opposed to, the net income tax concept. The fact of
the matter is still that various deductions, which are by no
means inconsequential, continue to be well provided under the
new law.
Uniformity of taxation, like the kindred concept of equal
protection, merely requires that all subjects or objects of
taxation, similarly situated, are to be treated alike both in
privileges and liabilities. Uniformity does not forfend
classification as long as: (1) the standards that are used thereof
are substantial and not arbitrary, (2) the categorization is
germane to achieve the legislative purpose, (3) the law applies,
all things being equal, to both present and future conditions,
and (4) the classification applies equally well to all those
belonging to the same class.
Having arrived at this conclusion, the plea of petitioner to have
the law declared unconstitutional for being violative of due
process must perforce fail. The due process clause may correctly
be invoked only when there is a clear contravention of inherent
27
or constitutional limitations in the exercise of the tax power. No
such transgression is so evident to us.
2. A general professional partnership, unlike an ordinary
business partnership (which is treated as a corporation for
income tax purposes and so subject to the corporate income
tax), is not itself an income taxpayer. The income tax is imposed
not on the professional partnership, which is tax exempt, but on
the partners themselves in their individual capacity computed
on their distributive shares of partnership profits. Section 23 of
the Tax Code, which has not been amended at all by Republic
Act 7496.
There is, then and now, no distinction in income tax liability
between a person who practices his profession alone or
individually and one who does it through partnership (whether
registered or not) with others in the exercise of a common
profession.
Partnerships are, under the Code, either "taxable partnerships"
or "exempt partnerships." Ordinarily, partnerships, no matter
how created or organized, are subject to income tax (and thus
alluded to as "taxable partnerships") which, for purposes of the
above categorization, are by law assimilated to be within the
context of, and so legally contemplated as, corporations. Except
for few variances, such as in the application of the "constructive
receipt rule" in the derivation of income, the income tax
approach is alike to both juridical persons. Obviously, SNIT is not
intended or envisioned, as so correctly pointed out in the
discussions in Congress during its deliberations on Republic Act
7496, aforequoted, to cover corporations and partnerships,
which are independently subject to the payment of income tax.
"Exempt partnerships," upon the other hand, are not similarly
identified as corporations nor even considered as independent
taxable entities for income tax purposes. A general professional
partnership is such an example. 4 Here, the partners themselves,
not the partnership (although it is still obligated to file an
income tax return [mainly for administration and data]), are
liable for the payment of income tax in their individual capacity
computed on their respective and distributive shares of profits.
In the determination of the tax liability, a partner does so as an
individual, and there is no choice on the matter. In fine, under
the Tax Code on income taxation, the general professional
partnership is deemed to be no more than a mere mechanism or
a flow-through entity in the generation of income by, and the
ultimate distribution of such income to, respectively, each of the
individual partners.
Section 6 of Revenue Regulation No. 2-93 did not alter, but
merely confirmed, the above standing rule as now so modified
by Republic ActNo. 7496 on basically the extent of allowable
deductions applicable to all individual income taxpayers on their
non-compensation income. There is no evident intention of the
law, either before or after the amendatory legislation, to place in
an unequal footing or in significant variance the income tax
treatment of professionals who practice their respective
professions individually and of those who do it through a general
professional partnership.
WHEREFORE, the petitions are DISMISSED.
CIR V. PHILIPPINE AIRLINES, INC.
G.R. No. 18006
Topic: INCOME TAX Minimum Income Tax
FACTS:
PHILIPPINE AIRLINES, INC. had zero taxable income for 2000 but
would have been liable for Minimum Corporate Income Tax
based on its gross income. However, PHILIPPINE AIRLINES, INC.
did not pay the Minimum Corporate Income Tax using as basis
its franchise which exempts it from all other taxes upon
payment of whichever is lower of either (a) the basic corporate
income tax based on the net taxable income or (b) a franchise
tax of 2%.
ISSUE:
Is PAL liable for Minimum Corporate Income Tax?
HELD:
NO. PHILIPPINE AIRLINES, INC.s franchise clearly refers to "basic
corporate income tax" which refers to the general rate of 35%
(now 30%). In addition, there is an apparent distinction under
the Tax Code between taxable income, which is the basis for
basic corporate income tax under Sec. 27 (A) and gross income,
which is the basis for the Minimum Corporate Income Tax under
Section 27 (E). The two terms have their respective technical
meanings and cannot be used interchangeably. Not being
covered by the Charter which makes PAL liable only for basic
corporate income tax, then Minimum Corporate Income Tax is
included in "all other taxes" from which PHILIPPINE AIRLINES,
INC. is exempted.
The CIR also can not point to the Substitution Theory which
states that Respondent may not invoke the in lieu of all other
taxes provision if it did not pay anything at all as basic
corporate income tax or franchise tax. The Court ruled that it is
not the fact tax payment that exempts Respondent but the
exercise of its option. The Court even pointed out the fallacy of
the argument in that a measly sum of one peso would suffice to
exempt PAL from other taxes while a zero liability would not and
said that there is really no substantial distinction between a zero
tax and a one-peso tax liability. Lastly, the Revenue
Memorandum Circular stating the applicability of the MCIT to
PAL does more than just clarify a previous regulation and goes
beyond mere internal administration and thus cannot be given
effect without previous notice or publication to those who will be
affected thereby.
COMMISSIONER OF INTERNAL REVENUE vs. ST. LUKE'S
MEDICAL CENTER, INC.
G.R. No. 195909.
FACTS:
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized
as a non-stock and non-profit corporation. Under its articles of
incorporation, one its corporate purpose is to establish, equip,
operate and maintain a non-stock, non-profit Christian,
benevolent, charitable and scientific hospital which shall give
curative, rehabilitative and spiritual care to the sick, diseased
and disabled persons provided that purely medical and surgical
services shall be performed by duly licensed physicians and
surgeons who may be freely and individually contracted by
patients;
The Bureau of Internal Revenue (BIR) assessed St. Luke's
deficiency taxes amounting to P76,063,116.06 for 1998,
comprised of deficiency income tax, value-added tax,
withholding tax on compensation and expanded withholding tax.
St. Luke's filed an administrative protest with the BIR against the
deficiency tax assessments. The BIR did not act on the protest
within the 180-day period under Section 228 of the NIRC. Thus,
St. Luke's appealed to the CTA.
Argument of St. Lukes:
St. Luke's maintained that it is a non-stock and non-profit
institution for charitable and social welfare purposes under
Section 30(E) and (G) of the NIRC. It argued that the making of
profit per se does not destroy its income tax exemption.
Argument of BIR:
According to the BIR, Section 27(B), introduced in 1997, "is a
new provision intended to amend the exemption on non-profit
hospitals that were previously categorized as non-stock, non-
profit corporations under Section 26 of the 1997 Tax Code
The Ruling of the Court of Tax Appeals
WHEREFORE, the Amended Petition for Review [by St. Luke's] is
hereby PARTIALLY GRANTED. Accordingly, the 1998 deficiency
VAT assessment issued by respondent against petitioner in the
amount of P110,000.00 is hereby CANCELLED and WITHDRAWN.
However, petitioner is hereby ORDERED to PAY deficiency
income tax and deficiency expanded withholding tax for the
taxable year 1998 in the respective amounts of P5,496,963.54
and P778,406.84 or in the sum of P6,275,370.38
Hence, CIR filed this petition.
ISSUE:
The sole issue is whether St. Luke's is liable for deficiency
income tax in 1998 under Section 27 (B) of the NIRC, which
imposes a preferential tax rate of 10% on the income of
proprietary non-profit hospitals.
RULING:
This Court resolves this case on a pure question of law, which
involves the interpretation of Section 27 (B) vis- -vis Section 30
(E) and (G) of the National Internal Revenue Code of the
Philippines (NIRC), on the income tax treatment of proprietary
non-profit hospitals.
Argument of BIR (reiterated its argument before the CTA):
28
According to the BIR, Section 27(B), introduced in 1997, "is a
new provision intended to amend the exemption on non-profit
hospitals that were previously categorized as non-stock, non-
profit corporations under Section 26 of the 1997 Tax Code.
The 10% income tax rate under Section 27(B) specifically
pertains to proprietary educational institutions and proprietary
non-profit hospitals.
SEC. 27. Rates of Income Tax on Domestic Corporations. -
(B) Proprietary Educational Institutions and Hospitals. -
Proprietary educational institutions and hospitals which are non-
profit shall pay a tax of ten percent (10%) on their taxable
income except those covered by Subsection (D) (TAKE NOTE: D
refers to passive income) hereof:
Provided, That if the gross income from unrelated trade,
business or other activity exceeds fifty percent (50%) of the
total gross income derived by such educational institutions or
hospitals from all sources, the tax prescribed in Subsection (A)
hereof shall be imposed on the entire taxable income.
For purposes of this Subsection, the term 'unrelated trade,
business or other activity' means any trade, business or other
activity, the conduct of which is not substantially related to the
exercise or performance by such educational institution or
hospital of its primary purpose or function.
Argument of St. Lukes:
St. Luke's claims tax exemption under Section 30(E) and (G) of
the NIRC. It contends that it is a charitable institution and an
organization promoting social welfare; the arguments of St.
Luke's focus on the wording of Section 30(E) exempting from
income tax non-stock, non-profit charitable institutions.
SECTION 30. Exemptions from Tax on Corporations - The
following organizations shall not be taxed under this Title in
respect to income received by them as such:
(E) Nonstock corporation or association organized and operated
exclusively for religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of veterans, no part of
its net income or asset shall belong to or inure to the benefit of
any member, organizer, officer or any specific person;
(G) Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare;
XXXX
Notwithstanding the provisions in the preceding paragraphs, the
income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or
from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax
imposed under this Code.
The Court partly grants the petition of the BIR but on a different
ground.
We hold that Section 27(B) of the NIRC does not remove the
income tax exemption of proprietary non-profit hospitals under
Section 30(E) and (G). Section 27(B) on one hand, and Section
30(E) and (G) on the other hand, can be construed together
without the removal of such tax exemption.
The effect of the introduction of Section 27(B) is to subject the
taxable income of two specific institutions, namely, proprietary
non-profit educational institutions and proprietary non-profit
hospitals, which are among the institutions covered by Section
30, to the 10% preferential rate under Section 27(B) instead of
the ordinary 30% corporate rate under the last paragraph of
Section 30 in relation to Section 27(A)(1).
RATIONALE FOR THE RULING:
Section 27(B) of the NIRC imposes a 10% preferential tax rate on
the income of
(1) proprietary non-profit educational institutions and
(2) proprietary non-profit hospitals.
The only qualifications for hospitals are that they must be
proprietary and non-profit.
Proprietary means private, following the definition of a
"proprietary educational institution" as "any private school
maintained and administered by private individuals or groups"
with a government permit.
Non-profit" means no net income or asset accrues to or
benefits any member or specific person, with all the net income
or asset devoted to the institution's purposes and all its
activities conducted not for profit.
An organization may be considered as non-profit if it does not
distribute any part of its income to stockholders or members.
However, despite its being a tax exempt institution, any income
such institution earns from activities conducted for profit is
taxable, as expressly provided in the last paragraph of Section
30 Charity is essentially a gift to an indefinite number of
persons which lessens the burden of government. In other
words, charitable institutions provide for free goods and services
to the public which would otherwise fall on the shoulders of
government. Thus, as a matter of efficiency, the government
forgoes taxes which should have been spent to address public
needs, because certain private entities already assume a part of
the burden. This is the rationale for the tax exemption of
charitable institutions.
As a general principle, a charitable institution does not lose its
character as such and its exemption from taxes simply because
it derives income from paying patients, whether out-patient, or
confined in the hospital, or receives subsidies from the
government, so long as the money received is devoted or used
altogether to the charitable object which it is intended to
achieve; and no money inures to the private benefit of the
persons managing or operating the institution.
The Constitution exempts charitable institutions only from real
property taxes. In the NIRC, Congress decided to extend the
exemption to income taxes.
Section 30(E) of the NIRC provides that a charitable institution
must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to
the benefit of any member, organizer, officer or any specific
person.
Thus, both the organization and operations of the charitable
institution must be devoted "exclusively" for charitable
purposes.
However, under Lung Center, any profit by a charitable
institution must not only be plowed back as income but must be
"devoted or used altogether to the charitable object which it is
intended to achieve."
There is no dispute that St. Luke's is organized as a non-stock
and non-profit charitable institution. However, this does not
automatically exempt St. Luke's from paying taxes. This only
refers to the organization of St. Luke's. Even if St. Luke's meets
the test of charity, a charitable institution is not ipso facto tax
exempt.
1. To be exempt from real property taxes, Section 28(3), Article
VI of the Constitution requires that a charitable institution use
the property "actually, directly and exclusively" for charitable
purposes.
2. To be exempt from income taxes, Section 30(E) of the NIRC
requires that a charitable institution must be "organized and
operated exclusively" for charitable purposes.
3. Likewise, to be exempt from income taxes, Section 30(G) of
the NIRC requires that the institution be "operated exclusively"
for social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies
the words "organized and operated exclusively" by providing
that:
Notwithstanding the provisions in the preceding paragraphs, the
income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or
from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax
imposed under this Code. In short, the last paragraph of Section
30 provides that if a tax exempt charitable institution conducts
"any" activity for profit, such activity IS SUBJECT TO TAX even as
its not-for-profit activities remain tax exempt.
Thus, even if the charitable institution must be "organized and
operated exclusively" for charitable purposes, it is nevertheless
allowed to engage in "activities conducted for profit" without
losing its tax exempt status for its not-for-profit activities. The
29
only consequence is that the "income of whatever kind and
character" of a charitable institution "from any of its activities
conducted for profit, regardless of the disposition made of such
income, shall be subject to tax." Prior to the introduction of
Section 27(B), the tax rate on such income from for-profit
activities was the ordinary corporate rate of 30% under Section
27(A). With the introduction of Section 27(B), the tax rate is now
10%.
WHEREFORE, the petition of the Commissioner of Internal
Revenue in G.R. No. 195909 is PARTLY GRANTED.
Commissioner of Internal Revenue vs. Citytrust
Investment Phils., Inc., G.R. No. 139786
Asian Bank Corporation vs CIR G.R. No. 140857
FACTS:
Case is about conflicting decisions regarding the inclusion of the
twenty percent (20%) final withholding tax (FWT) on a banks
passive income form part of the taxable gross receipts for the
purpose of computing the five percent (5%) gross receipts tax
(GRT).
On January 30, 1996, the CTA, in Asian Bank Corporation v.
Commissioner of Internal Revenue (ASIAN BANK case), ruled
that the basis in computing the 5% GRT is the gross receipts
minus the 20% FWT. In other words, the 20% FWT on a banks
passive income does not form part of the taxable gross receipts.
On the strength of the above-mentioned case City Trust and
Asian Bank Corp filed for petition for review with the CTA, which
allowed for a refund of the 5% GRT they paid on the portion of
20% FWT.
CIR appealed the CTA decision. CA affirmed the CTA decision on
Citytrust but reversed the CTA decision on Asian Bank
ISSUES:
f Does the twenty percent (20%) final withholding tax
(FWT) on a banks passive income form part of the
taxable gross receipts for the purpose of computing the
five percent (5%) gross receipts tax (GRT)?
S Would inclusion of the 20% FWT in the gross receipt
constitute double taxation?
RULING:
1. Interest income, whether actually received or
merely accrued (income received + amount withheld
representing 20% FWT), form part of the banks taxable
gross receipts
A catena of cases decided by the SC is unanimous in defining
gross receipts as the entire receipts without any
deduction.
Citytrust and Asian Bank simply anchor their argument on
Section 4(e) of Revenue Regulations No. 12-80 stating that the
rates of taxes to be imposed on the gross receipts of such
financial institutions shall be based on all items of
income actually received. They contend that since the 20%
FWT is withheld at source, the same cannot be
considered actually received, hence, must be excluded from
the taxable gross receipts.
However, Revenue Regulations No. 12-80, had been superseded
by Revenue Regulations No. 17-84, which includes all interest
income (whether actual or accrued) in computing the GRT.
In Bank of Commerce (G.R. No. 149636, June 8, 2005), the court
held that actual receipt may either be physical receipt or
constructive receipt, thus:
When the depositary bank withholds the final tax to pay the tax
liability of the lending bank, there is prior to the withholding a
constructive receipt by the lending bank of the amount withheld.
Thus, the interest income actually received by the lending
bank, both physically and constructively, is the net
interest plus the amount withheld as final tax.
Because the amount withheld belongs to the taxpayer, he can
transfer its ownership to the government in payment of his tax
liability. The amount withheld indubitably comes from the
income of the taxpayer, and thus forms part of his gross
receipts.
Both Asian bank and Citytrust rely on Manila Jockey Club, but
what happened there is earmarking and not withholding.
It was held that the gross receipts of the Manila Jockey Club
should not include the 5% which went to the Board on Races
and to the owners of horses and jockeys, although delivered to
the Club.
Amounts earmarked do not form part of gross receipts because
these are by law or regulation reserved for some person other
than the taxpayer, although delivered or received. On the
contrary, amounts withheld form part of gross receipts because
these are in constructive possession and not subject to any
reservation. The distinction was explained in Solidbank, thus:
The Manila Jockey Club had to deliver to the Board on Races,
horse owners and jockeys amounts that never became the
property of the race track (Manila Jockey Club merely held
that these amounts were held in trust and did not form part of
gross receipts). Unlike these amounts, the interest income
that had been withheld for the government became
property of the financial institutions
upon constructive possession thereof.
It is ownership that determines whether interest income
forms part of taxable gross receipts being originally
owned by these financial institutions as part of their
interest income, the FWT should form part of their
taxable gross receipts.
2. The imposition of the 20% FWT and 5% GRT does not
constitute double taxation.
Double taxation means taxing for the same tax period the same
thing or activity twice, when it should be taxed but once, for the
same purpose and with the same kind of character of tax. This
is not the situation in the case at bar. The GRT is a percentage
tax under Title V of the Tax Code ([Section 121], Other
Percentage Taxes), while the FWT is an income tax under Title II
of the Code (Tax on Income). The two concepts are different
from each other.
In fine, let it be stressed that tax exemptions are highly
disfavored. It is a governing principle in taxation that tax
exemptions are to be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority and should
be granted only by clear and unmistakable terms.
MARUBENI CORPORATION (formerly Marubeni Iida, Co.,
Ltd.) vs. CIR
G.R. No. 76573.
FACTS:
Petitioner Marubeni s a foreign corporation duly organized under
the existing laws of Japan and duly licensed to engage in
business under Philippine laws.
Marubeni of Japan has equity investments in Atlantic Gulf &
Pacific Co. of Manila.
AG&P declared and directly remitted the cash dividends to
Marubenis head office in Tokyo net of the final dividend tax and
withholding profit remittance tax.
Thereafter, Marubeni, through SGV, sought a ruling from the BIR
on whether or not the dividends it received from AG&P are
effectively connected with its business in the Philippines as to be
considered branch profits subject to profit remittance tax.
The Acting Commissioner ruled that the dividends received by
Marubeni are not income from the business activity in which it is
engaged. Thus, the dividend if remitted abroad are not
considered branch profits subject to profit remittance tax.
Pursuant to such ruling, petitioner filed a claim for refund for the
profit tax remittance erroneously paid on the dividends remitted
by AG& P.
Respondent Commissioner denied the claim. It ruled that since
Marubeni is a non resident corporation not engaged in trade or
business in the Philippines it shall be subject to tax on income
earned from Philippine sources at the rate of 35% of its gross
income.
On the other hand, Marubeni contends that, following the
principal-agent relationship theory, Marubeni Japan is a resident
foreign corporation subject only to final tax on dividends
received from a domestic corporation.
ISSUE:
Whether or not Marubeni Japan is a resident foreign
corporation.
30
HELD:
No. The general rule is a foreign corporation is the same juridical
entity as its branch office in the Philippines . The rule is based
on the premise that the business of the foreign corporation is
conducted through its branch office, following the principal-
agent relationship theory. It is understood that the branch
becomes its agent.
However, when the foreign corporation transacts business in the
Philippines independently of its branch, the principal-agent
relationship is set aside. The transaction becomes one of the
foreign corporation, not of the branch. Consequently, the
taxpayer is the foreign corporation, not the branch or the
resident foreign corporation.
Thus, the alleged overpaid taxes were incurred for the
remittance of dividend income to the head office in Japan which
is considered as a separate and distinct income taxpayer from
the branch in the Philippines.
THE MANILA WINE MERCHANTS, INC. v. CIR
G.R. No. L-26145.
FACTS:
"Petitioner, a domestic corporation organized in 1937, is
principally engaged in the importation and sale of whisky, wines,
liquors and distilled spirits. Its original subscribed and paid
capital was P500,000.00. Its capital of P500,000.00 was reduced
to P250,000.00 in 1950 with the approval of the Securities and
Exchange Commission but the reduction of the capital was
never implemented. On June 21, 1958, petitioners capital was
increased to P1,000,000.00 with the approval of the said
Commission.
On December 31, 1957, herein respondent caused the
examination of herein petitioners book of account and found
the latter of having unreasonably accumulated surplus of
P428,934.32 for the calendar year 1947 to 1957, in excess of
the reasonable needs of the business subject to the 25% surtax
imposed by Section 25 of the Tax Code.
On February 26, 1963, the Commissioner of Internal Revenue
demanded upon the Manila Wine Merchants, Inc. payment of
P126,536.12 as 25% surtax and interest on the latters
unreasonable accumulation of profits and surplus for the year
1957
Respondent contends that petitioner has accumulated earnings
beyond the reasonable needs of its business because the
average ratio of the cash dividends declared and paid by
petitioner from 1947 to 1957 was 40.33% of the total surplus
available for distribution at the end of each calendar year. On
the other hand, petitioner contends that in 1957, it distributed
100% of its net earnings after income tax and part of the surplus
for prior years. Respondent further submits that the
accumulated earnings tax should be based on 25% of the total
surplus available at the end of each calendar year while
petitioner maintains that the 25% surtax is imposed on the total
surplus or net income for the year after deducting therefrom the
income tax due.
The records show the following analysis of petitioners net
income, cash dividends and earned surplus for the years 1946
to 1957:
Another basis of respondent in assessing petitioner for
accumulated earnings tax is its substantial investment of
surplus or profits in unrelated business. These investments are
itemized as follows:
As to the investment of P27,501.00 made by petitioner in the
Acme Commercial Co., Inc., Mr. N.R.E. Hawkins, president of the
petitioner corporation 2 explained as follows:
The first item consists of shares of Acme Commercial Co., Inc.
which the Company acquired in 1947 and 1949. In the said
years, we thought it prudent to invest in a business which
patronizes us. As a supermarket, Acme Commercial Co., Inc. is
one of our best customers. The investment has proven to be
beneficial to the stockholders of this Company. As an example,
the Company received cash dividends in 1961 totalling
P16,875.00 which was included in its income tax return for the
said year.
As to the investments of petitioner in Union Insurance Society of
Canton and Wack Wack Golf Club in the sums of P1,145.76 and
P1.00, respectively, the same official of the petitioner-
corporation stated that:
The second and fourth items are small amounts which we
believe would not affect this case substantially. As regards the
Union Insurance Society of Canton shares, this was a pre-war
investment, when Wise & Co., Inc., Manila Wine Merchants and
the said insurance firm were common stockholders of the Wise
Bldg. Co.,, Inc. and the three companies were all housed in the
same building. Union Insurance invested in Wise Bldg. Co., Inc.
but invited Manila Wine Merchants, Inc. to buy a few of its
shares.
As to the U.S.A. Treasury Bonds amounting to P347,217.50, Mr.
Hawkins explained as follows:
With regards to the U.S.A. Treasury Bills in the amount of
P347,217.50, in 1950, our balance sheet for the said year shows
the Company had deposited in current account in various banks
P629,403.64 which was not earning any interest. We decided to
utilize part of this money as reserve to finance our importations
and to take care of future expansion including acquisition of a
lot and the construction of our own office building and bottling
plant.
At that time, we believed that a dollar reserve abroad would be
useful to the Company in meeting immediate urgent orders of
its local customers. In order that the money may earn interest,
the Company, on May 31, 1951 purchased US Treasury bills with
90-day maturity and earning approximately 1% interest with the
face value of US$175,000.00. US Treasury Bills are easily
convertible into cash and for the said reason they may be better
classified as cash rather than investments.
The Treasury Bills in question were held as such for many years
in view of our expectation that the Central Bank inspite of the
controls would allow no-dollar licenses importations. However,
since the Central Bank did not relax its policy with respect
thereto, we decided sometime in 1957 to hold the bills for a few
more years in view of our plan to buy a lot and construct a
building of our own. According to the lease agreement over the
building formerly occupied by us in Dasmarias St., the lease
was to expire sometime in 1957. At that time, the Company was
not yet qualified to own real property in the Philippines. We
therefore waited until 60% of the stocks of the Company would
be owned by Filipino citizens before making definite plans. Then
in 1959 when the Company was already more than 60% Filipino
owned, we commenced looking for a suitable location and then
finally in 1961, we bought the man lot with an old building on
Otis St., Paco, our present site, for P665,000.00. Adjoining
smaller lots were bought later. After the purchase of the main
property, we proceeded with the remodelling of the old building
and the construction of additions, which were completed at a
cost of P143,896.00 in April, 1962.
In view of the needs of the business of this Company and the
purchase of the Otis lots and the construction of the
improvements thereon, most of its available funds including the
Treasury Bills had been utilized, but inspite of the said expenses
the Company consistently declared dividends to its
stockholders. The Treasury Bills were liquidated on February 15,
1962.
Respondent found that the accumulated surplus in question
were invested to unrelated business which were not considered
in the immediate needs of the Company such that the 25%
surtax be imposed therefrom."
Petitioner appealed to the Court of Tax Appeals.
On the basis of the tabulated figures, supra, the Court of Tax
Appeals found that the average percentage of cash dividends
distributed was 85.77% for a period of 11 years from 1946 to
1957 and not only 40.33% of the total surplus available for
distribution at the end of each calendar year actually distributed
by the petitioner to its stockholders, which is indicative of the
view that the Manila Wine Merchants, Inc. was not formed for
the purpose of preventing the imposition of income tax upon its
shareholders.
With regards to the alleged substantial investment of surplus or
profits in unrelated business, the Court of Tax Appeals held that
the investment of petitioner with Acme Commercial Co., Inc.,
Union Insurance Society of Canton and with the Wack Wack Golf
and Country Club are harmless accumulation of surplus and,
therefore, not subject to the 25% surtax provided in Section 25
of the Tax Code.
As to the U.S.A. Treasury Bonds amounting to P347,217.50, the
Court of Tax Appeals ruled that its purchase was in no way
related to petitioners business of importing and selling wines,
whisky, liquors and distilled spirits. Respondent Court was
convinced that the surplus of P347,217.50 which was invested in
the U.S.A. Treasury Bonds was availed of by petitioner for the
purpose of preventing the imposition of the surtax upon
31
petitioners shareholders by permitting its earnings and profits
to accumulate beyond the reasonable needs of business. Hence,
the Court of Tax Appeals modified respondents decision by
imposing upon petitioner the 25% surtax for 1957 only in the
amount of P86,804.38
ISSUES:
(1) whether the purchase of the U.S.A. Treasury bonds by
petitioner in 1951 can be construed as an investment to an
unrelated business and hence, such was availed of by petitioner
for the purpose of preventing the imposition of the surtax upon
petitioners shareholders by permitting its earnings and profits
to accumulate beyond the reasonable needs of the business,
and if so,
(2) whether the penalty tax of twenty-five percent (25%) can be
imposed on such improper accumulation in 1957 despite the
fact that the accumulation occurred in 1951.
HELD:
The pertinent provision of the National Internal Revenue Code
reads as follows:
"Sec. 25. Additional tax on corporations improperly
accumulating profits or surplus. (a) Imposition of Tax. If any
corporation, except banks, insurance companies, or personal
holding companies whether domestic or foreign, is formed or
availed of for the purpose of preventing the imposition of the tax
upon its shareholders or members or the shareholders or
members of another corporation, through the medium of
permitting its gains and profits to accumulate instead of being
divided or distributed, there is levied and assessed against such
corporation, for each taxable year, a tax equal to twenty-five per
centum of the undistributed portion of its accumulated profits or
surplus which shall be in addition to the tax imposed by section
twenty-four and shall be computed, collected and paid in the
same manner and subject to the same provisions of law,
including penalties, as that tax: Provided, that no such tax shall
be levied upon any accumulated profits or surplus, if they are
invested in any dollar-producing or dollar-saving industry or in
the purchase of bonds issued by the Central Bank of the
Philippines.
(c) Evidence determinative of purpose. The fact that the
earnings of profits of a corporation are permitted to accumulate
beyond the reasonable needs of the business shall be
determinative of the purpose to avoid the tax upon its
shareholders or members unless the corporation, by clear
preponderance of evidence, shall prove the contrary." (As
amended by Republic Act No. 1823)
A prerequisite to the imposition of the tax has been that the
corporation be formed or availed of for the purpose of avoiding
the income tax (or surtax) on its shareholders, or on the
shareholders of any other corporation by permitting the
earnings and profits of the corporation to accumulate instead of
dividing them among or distributing them to the shareholders. If
the earnings and profits were distributed, the shareholders
would be required to pay an income tax thereon whereas, if the
distribution were not made to them, they would incur no tax in
respect to the undistributed earnings and profits of the
corporation. 8 The touchstone of liability is the purpose behind
the accumulation of the income and not the consequences of
the accumulation. 9 Thus, if the failure to pay dividends is due
to some other cause, such as the use of undistributed earnings
and profits for the reasonable needs of the business, such
purpose does not fall within the interdiction of the statute.
An accumulation of earnings or profits (including undistributed
earnings or profits of prior years) is unreasonable if it is not
required for the purpose of the business, considering all the
circumstances of the case.
In purchasing the U.S.A. Treasury Bonds, in 1951, petitioner
argues that these bonds were so purchased (1) in order to
finance their importation; and that a dollar reserve abroad would
be useful to the Company in meeting urgent orders of its local
customers and (2) to take care of future expansion including the
acquisition of a lot and the construction of their office building
and bottling plant.
We find no merit in the petition.
To avoid the twenty-five percent (25%) surtax, petitioner has to
prove that the purchase of the U.S.A. Treasury Bonds in 1951
with a face value of $175,000.00 was an investment within the
reasonable needs of the Corporation.
To determine the "reasonable needs" of the business in order to
justify an accumulation of earnings, the Courts of the United
States have invented the so-called "Immediacy Test" which
construed the words "reasonable needs of the business" to
mean the immediate needs of the business, and it was generally
held that if the corporation did not prove an immediate need for
the accumulation of the earnings and profits, the accumulation
was not for the reasonable needs of the business, and the
penalty tax would apply. 12 American cases likewise hold that
investment of the earnings and profits of the corporation in
stock or securities of an unrelated business usually indicates an
accumulation beyond the reasonable needs of the business.
The finding of the Court of Tax Appeals that the purchase of the
U.S.A. Treasury bonds were in no way related to petitioners
business of importing and selling wines whisky, liquors and
distilled spirits, and thus construed as an investment beyond the
reasonable needs of the business 14 is binding on Us, the same
being factual. 15 Furthermore, the wisdom behind thus finding
cannot be doubted
The records further reveal that from May 1951 when petitioner
purchased the U.S.A. Treasury shares, until 1962 when it finally
liquidated the same, it (petitioner) never had the occasion to
use the said shares in aiding or financing its importation. This
militates against the purpose enunciated earlier by petitioner
that the shares were purchased to finance its importation
business. To justify an accumulation of earnings and profits for
the reasonably anticipated future needs, such accumulation
must be used within a reasonable time after the close of the
taxable year.
Petitioner advanced the argument that the U.S.A. Treasury
shares were held for a few more years from 1957, in view of a
plan to buy a lot and construct a building of their own; that at
that time (1957), the Company was not yet qualified to own real
property in the Philippines, hence it (petitioner) had to wait until
sixty percent (60%) of the stocks of the Company would be
owned by Filipino citizens before making definite plans.
These arguments of petitioner indicate that it considers the
U.S.A. Treasury shares not only for the purpose of aiding or
financing its importation but likewise for the purpose of buying a
lot and constructing a building thereon in the near future, but
conditioned upon the completion of the 60% citizenship
requirement of stock ownership of the Company in order to
qualify it to purchase and own a lot. The time when the
company would be able to establish itself to meet the said
requirement and the decision to pursue the same are dependent
upon various future contingencies. Whether these contingencies
would unfold favorably to the Company and if so, whether the
Company would decide later to utilize the U.S.A. Treasury shares
according to its plan, remains to be seen. From these assertions
of petitioner, We cannot gather anything definite or certain.
This, We cannot approve.
In order to determine whether profits are accumulated for the
reasonable needs of the business as to avoid the surtax upon
shareholders, the controlling intention of the taxpayer is that
which is manifested at the time of accumulation not
subsequently declared intentions which are merely the product
of afterthought. 19 A speculative and indefinite purpose will not
suffice. The mere recognition of a future problem and the
discussion of possible and alternative solutions is not sufficient.
Definiteness of plan coupled with action taken towards its
consummation are essential. 20 The Court of Tax Appeals
correctly made the following ruling:
"As to the statement of Mr. Hawkins in Exh. "B" regarding the
expansion program of the petitioner by purchasing a lot and
building of its own, we find no justifiable reason for the retention
in 1957 or thereafter of the US Treasury Bonds which were
purchased in 1951.
"Moreover, if there was any thought for the purchase of a lot
and building for the needs of petitioners business, the
corporation may not with impunity permit its earnings to pile up
merely because at some future time certain outlays would have
to be made. Profits may only be accumulated for the reasonable
needs of the business, and implicit in this is further requirement
of a reasonable time.
Finally, petitioner asserts that the surplus profits allegedly
accumulated in the form of U.S.A. Treasury shares in 1951 by it
(petitioner) should not be subject to the surtax in 1957. In other
words, petitioner claims that the surtax of 25% should be based
on the surplus accumulated in 1951 and not in 1957.
This is devoid of merit.
The rule is now settled in Our jurisprudence that undistributed
earnings or profits of prior years are taken into consideration in
32
determining unreasonable accumulation for purposes of the
25% surtax.
In determining whether accumulations of earnings or profits in a
particular year are within the reasonable needs of a corporation,
it is necessary to take into account prior accumulations, since
accumulations prior to the year involved may have been
sufficient to cover the business needs and additional
accumulations during the year involved would not reasonably be
necessary."
WHEREFORE, IN VIEW OF THE FOREGOING, the decision of the
Court of Tax Appeals is AFFIRMED in toto, with costs against
petitioner.
Cyanamid Philippines, Inc. vs. Court of Appeals, et al.,
G.R. No. 108067, January 20, 2000
CYANAMID PHIL., INC. vs. COURT OF APPEALS, ET AL.G.R. No.
108067January 20, 2000
Facts:
Petitioner, Cyanamid Philippines, Inc., is a corporation engaged
in the manufacture of pharmaceutical products and chemicals, a
wholesaler of imported finished goods, and an
importer/indentor. The CIR sent an assessment letter to
petitioner Cyanamid Phil., Inc. and demanded the payment of
deficiency income tax for 1981. Petitioner then protested the
assessments, particularly, (1) the 25% Surtax Assessment; (2)
the 1981Deficiency Income Assessment; and (3) the 1981
Deficiency Percentage Assessment. Petitioner claimed that the
surtax for the undue accumulation of earnings was not proper
because the said profits were retained to increase petitioners
working capital and it would be used for reasonable business
needs of the company. The CIR, however, refused to allow the
cancellation of the assessment notices. Petitioner appealed to
the CTA. During the pendency of the case, both parties agreed
to compromise the 1981 Deficiency Income Assessment.
However, the surtax on improperly accumulated profits
remained unresolved.
Issue:
Is a manufacturing company liable for the accumulated earnings
tax, despite its claim that earnings were accumulated to
increase working capital and to be used for its reasonable
needs, if it fails to present evidence to prove such allegations?
Held:
Yes. The respondent court correctly decided that the petitioner is
liable for the accumulated earnings tax for the year 1981 based
on the following grounds:
1. The amendatory provision of Sec. 25 of the
1977 NIRC, which was PD 1739,enumerated the corporations
exempt from the imposition of improperly accumulated tax
such as banks, non-bank financial intermediaries, insurance
companies and corporations authorized by the Central
Bank of the Phils. to hold shares of stocks of banks. The
petitioner does not fall among those exempt classes.
2. If the CIR determined that the corporation avoided the
tax on shareholders by permitting earnings or profits to
accumulate, and the taxpayer contested such a
determination, the burden of proving is on the
taxpayer. And in order to determine whether profits are
accumulated for the reasonable needs of the business
to avoid the surtax upon shareholders, it must be
shown that the controlling intention of the taxpayer is
manifested at the time of accumulation, not intentions
declared subsequently, which are mere afterthoughts.
Furthermore, the accumulated profits must be used
within a reasonable time after the close of the taxable
years. In this case, petitioner did not establish, by clear
and convincing evidence when such accumulation of
profit was for the immediate needs of the business.
3. 3.Lastly, in the present case, the Tax Court opted to
determine the working capital sufficiency by using the
ratio between current assets to current liabilities. The
working capital needs of a business depend upon the
nature of the business, its credit policies,the amount of
inventories, the rate of turnover, the amount of
accounts receivable, the collection rate, the availability
of credit to the business, and similar factors. Petitioner,
by adhering to the bardahl formula, failed to impress
the tax court with the required definiteness envisioned
by the statute. We agree with the tax court that the
burden of proof to establish that the profits
accumulated were not beyond the reasonable needs of
the company, remained on the taxpayer. Hence, this
Court will not set aside lightly the conclusion reached
by the CTA, which by the very nature of its function, is
dedicated exclusively to the consideration of tax
problems and has necessarily developed expertise on
the subject unless there has been an abuse of
improvident exercise of authority
CIR vs. CA, CTA and YMCA G.R. No. 124043.
FACTS:
The Commissioner of Internal Revenue filed a petition for review
on certiorari assailing the decision of the Court of Appeals
affirming the initial rulings of the CTA in allowing YMCA to claim
tax exemption from the lease of its real property.
YMCA is a non-stock, non-profit institution. Being such, on the
year 1980 it earned the following as rent income: (1)
P676,829.80 for leasing its premises to small shop owners like
canteen operators. (2) P44,259 as parking fees collected from
non-members.
In 1984, the CIR assessed YMCA for a total amount of
P415,615.01 representing including surcharge and interest, for
deficiency income tax, deficiency expanded withholding taxes
on rentals and professional fees and deficiency withholding tax
on wages.
YMCA in response filed a letter protest with the CIR, one which
the latter denied. Aggrieved, YMCA filed a petition for review
with the CTA which ruled in its favor, ruling that the canteen
operations and parking were reasonably necessary for the
accomplishment of the objectives of the YMCA.
The CIR then appealed to the Court of Appeals which initially
reversed the decision of the CTA. But upon motion for
reconsideration, the CA reversed itself and again ruled in favor
of YMCA adopting the ratio of the CTA.
ISSUE:
(1) Whether or not the collection or earnings of rental income
from the lease of certain premises and income earned from
parking fees shall fall under the last paragraph of Section 27
(Now section 30) of the National Internal Revenue Code of 1977,
as amended
RULING:
NO. Because taxes are the lifeblood of the nation, the Court has
always applied the doctrine of strict interpretation in construing
tax exemptions. Furthermore, a claim of statutory exemption
from taxation should be manifest and unmistakable from the
language of the law on which it is based. Thus, the claimed
exemption "must expressly be granted in a statute stated in a
language too clear to be mistaken." In the instant case, the
exemption claimed by the YMCA is expressly disallowed by the
very wording of the last paragraph of then Section 27 of the
NIRC which mandates that the income of exempt organizations
(such as the YMCA) from any of their properties, real or
personal, be subject to the tax imposed by the same Code.
Because the last paragraph of said section unequivocally
subjects to tax the rent income of the YMCA from its real
property, the Court is duty-bound to abide strictly by its literal
meaning and to refrain from resorting to any convoluted
attempt at construction. It is axiomatic that where the language
of the law is clear and unambiguous, its express terms must be
applied. Parenthetically, a consideration of the question of
construction must not even begin, particularly when such
question is on whether to apply a strict construction or a liberal
one on statutes that grant tax exemptions to "religious,
charitable and educational propert[ies] or institutions." The
phrase "any of their activities conducted for profit" does not
qualify the word "properties." This makes income from the
property of the organization taxable, regardless of how that
income is used whether for profit or for lofty non-profit
purposes. Verba legis non est recedendum. Hence, Respondent
Court of Appeals committed reversible error when it allowed, on
reconsideration, the tax exemption claimed by YMCA on income
it derived from renting out its real property, on the solitary but
unconvincing ground that the said income is not collected for
profit but is merely incidental to its operation. The law does not
make a distinction. The rental income is taxable regardless of
whence such income is derived and how it is used or disposed
of. Where the law does not distinguish, neither should we.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE
ESTATE OF BENIGNO P. TODA, JR., Represented by Special
Co-administrators Lorna Kapunan and Mario Luza
Bautista, respondents.
33
Facts:
The President of CIC Benigno Toda sold to Rafael A.
Altonaga a commercial building known as Cibles Building
situated in two parcels of land for P100 million, who, in turn, sold
the same property on the same day to Royal Match Inc. (RMI) for
P200 million evidenced by Deeds of Absolute Sale notarized on
the same day by the same notary public. For the sale of the
property to RMI, Altonaga paid capital gains tax in the amount of
P10 million.
On 16 April 1990, CIC filed its corporate annual income
tax return for the year 1989, declaring, among other things, its
gain from the sale of real property. After crediting withholding
taxes it paid its net taxable income of P75,987,725.
Subsequently in 1990, Toda sold his entire shares of stocks in
CIC to Le Hun T. Choa. Three and a half years later, Toda died.
A Notice of Assessment was sent to the new CIC on March 29,
1994 by the Commissioner of Internal Revenue for deficiency
income tax arising from the alleged simulated sale of the
building. The new CIC asked for reconsideration, asserting that
the assessment should be directed against the old CIC.
Upon receipt by the Estate of Toda the Notice of Assessment, it
thereafter filed a protest. The Commissioner dismissed the
protest, stating that a fraudulent scheme was deliberately
perpetuated by the CIC wholly owned and controlled by Toda by
covering up the additional gain of P100 million.
In the CTA, the Estate interposed that the inference of fraud of
the sale of the properties is unreasonable and unsupported; and
that the right of the Commissioner to assess CIC had already
prescribed. The Commissioner on its part said that the two
transactions actually constituted a single sale of the property by
CIC to RMI, and that Altonaga was neither the buyer of the
property from CIC nor the seller of the same property to RMI.
The additional gain of P100 million (the difference between the
second simulated sale for P200 million and the first simulated
sale for P100 million) realized by CIC was taxed at the rate of
only 5% purportedly as capital gains tax of Altonaga, instead of
at the rate of 35% as corporate income tax of CIC. Since such
falsity or fraud was discovered by the BIR only on 8 March 1991,
the assessment issued on 9 January 1995 was well within the
prescriptive period. The CTA held that the Commissioner failed
to prove that CIC committed fraud to deprive the government of
the taxes due it and the government's right to assess CIC
prescribed on 15 April 1993. The Court of Appeals affirmed the
decision of the CTA. Hence, this petition.
Issues: 1. Is this a case of tax evasion or tax avoidance?
2. Has the period for assessment of deficiency income tax for
the year 1989 prescribed?
3. Can respondent Estate be held liable for the deficiency
income tax of CIC for the year 1989, if any?
Ruling:
1. Tax avoidance and tax evasion are the two most common
ways used by taxpayers in escaping from taxation. Tax
avoidance is the tax saving device within the means sanctioned
by law. This method should be used by the taxpayer in good
faith and at arms length. Tax evasion, on the other hand, is a
scheme used outside of those lawful means and when availed
of, it usually subjects the taxpayer to further or additional civil
or criminal liabilities.
Tax evasion connotes the integration of three factors: (1) the
end to be achieved, i.e., the payment of less than that known by
the taxpayer to be legally due, or the non-payment of tax when
it is shown that a tax is due; (2) an accompanying state of mind
which is described as being "evil," in "bad faith," "willful," or
"deliberate and not accidental"; and (3) a course of action or
failure of action which is unlawful.
All these factors are present in the instant case. It is
significant to note that as early as 4 May 1989, prior to the
purported sale of the Cibeles property by CIC to Altonaga on 30
August 1989, CIC received P40 million from RMI, and not from
Altonaga. That P40 million was debited by RMI and reflected in
its trial balance. Also, as of 31 July 1989, another P40 million
was debited and reflected in RMI's trial balance. This would
show that the real buyer of the properties was RMI, and not the
intermediary Altonaga.
The investigation conducted by the BIR disclosed that Altonaga
was a close business associate and one of the many trusted
corporate executives of Toda. That Altonaga was a mere conduit
finds support in the admission of respondent Estate that the sale
to him was part of the tax planning scheme of CIC. The
admission is borne by the records. The scheme resorted to by
CIC in making it appear that there were two sales of the subject
properties, i.e., from CIC to Altonaga, and then from Altonaga to
RMI cannot be considered a legitimate tax planning. Such
scheme is tainted with fraud.
Here, it is obvious that the objective of the sale to Altonaga was
to reduce the amount of tax to be paid especially that the
transfer from him to RMI would then subject the income to only
5% individual capital gains tax, and not the 35% corporate
income tax. Altonaga's sole purpose of acquiring and
transferring title of the subject properties on the same day was
to create a tax shelter. The intermediary transaction, i.e., the
sale of Altonaga, which was prompted more on the mitigation of
tax liabilities than for legitimate business purposes constitutes
one of tax evasion. Hence, the sale to Altonaga should be
disregarded for income tax purposes. The two sale transactions
should be treated as a single direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by then Section
24 of the NIRC of 1986, as amended (now 27 (A) of the Tax
Reform Act of 1997).
2. The period of assessment has not prescribed by virtue of
Section 269 of the NIRC of 1986 (now Section 222 of the Tax
Reform Act of 1997). Put differently, in cases of (1) fraudulent
returns; (2) false returns with intent to evade tax; and (3) failure
to file a return, the period within which to assess tax is ten years
from discovery of the fraud, falsification or omission, as the case
may be.
Although the BIR was amply informed of the transactions even
prior to the execution of the necessary documents to affect the
transfer in a query by Altonaga in August 24, 1989 regarding tax
consequences of the sale, such circumstance do not negate the
existence of fraud. And even assuming arguendo that there was
no fraud, we find that the income tax return filed by CIC for the
year 1989 was false. It did not reflect the true or actual amount
gained from the sale.
The false return was filed on 15 April 1990, and the
falsity thereof was claimed to have been discovered only on 8
March 1991. The assessment for the 1989 deficiency income
tax of CIC was issued on 9 January 1995. Clearly, the issuance of
the correct assessment for deficiency income tax was well
within the prescriptive period.
3. Respondent estate cannot deny liability for CIC's deficiency
income tax for the year 1989. A corporation has a juridical
personality distinct and separate from the persons owning or
composing it. Thus, the owners or stockholders of a corporation
may not generally be made to answer for the liabilities of a
corporation and vice versa. There are, however, certain
instances in which personal liability may arise, i.e., he agrees to
hold himself personally and solidarily liable with the corporation.
It is worth noting that when the late Toda sold his shares of stock
to Le Hun T. Choa, he knowingly and voluntarily held himself
personally liable for all the tax liabilities of CIC and the buyer for
the years 1987, 1988, and 1989 provided in the Deed of Sale of
Shares of Stocks. When the late Toda undertook and agreed "to
hold the BUYER and Cibeles free from any all income tax
liabilities of Cibeles for the fiscal years 1987, 1988, and 1989,"
he thereby voluntarily held himself personally liable therefor.
Petition granted.
SANTOS vs. SERVIER PHILIPPINES, INC. and NATIONAL
LABOR RELATIONS COMMISSION
G.R. No. 166377
FACTS:
Petitioner Ma. Isabel Santos is a Human Resource Manager of
respondent Servier Philippines since 1991 up to 1999. She
attended a meeting in Paris, France on March 26 and 27 1998,
together with her husband and her only child. On March 29, she
and her family had dinner at Leon des Bruxelles, a restaurant
known for mussels. While having dinner, petitioner experienced
stomach pains and was rushed to the hospital; she fell into a
coma for 21 days and stayed at the ICU for 52. Doctors found
that she had an allergic reaction to the mussels.
During the time, respondent paid for her hospital bills, as well as
the stay of her family in Paris. Petitioner was subsequently
transferred to St. Lukes Medical Center in the Philippines.
In a letter dated May 14, 1999, respondent informed the
petitioner that the former had requested the latter's physician to
conduct a thorough physical and psychological evaluation of her
condition, to determine her fitness to resume her work at the
company. Petitioner's physician concluded that the former had
not fully recovered mentally and physically. Hence, respondent
34
was constrained to terminate petitioner's services effective
August 31, 1999.
As a consequence of petitioner's termination from employment,
respondent offered a retirement package which consists of:
Retirement Plan Benefits:P1,063,841.76, among other benefits.
Out of this amount, only P701,454.89 was released to
petitioner's husband, the balance thereof was withheld allegedly
for taxation purposes, and the other benefits were also not
given. Petitioner through her husband filed a case with the Labor
Arbiter and NLRC to recover said amounts.
The LA did not rule on the withholding of the income for tax
purposes, as did the NLRC, for allegedly a lack of jurisdiction on
their part to rule on the tax issue. But the latter tribunal ruled in
favour of petitioner for the other benefits. Unsatisfied, petitioner
is now questioning the propriety of the deduction.
ISSUES:
1. WHETHER OR NOT THE LABOR ARBITER AND THE NLRC HAVE
JURISDICTION TO RULE ON THE ILLEGAL DEDUCTION.
2. WHETHER OR NOT PETITIONERS RETIREMENT BENEFITS ARE
TAX EXEMPT.
RULING:
1. Contrary to the Labor Arbiter and NLRC's conclusions,
petitioner's claim for illegal deduction falls within the tribunal's
jurisdiction. It is noteworthy that petitioner demanded the
completion of her retirement benefits, including the amount
withheld by respondent for taxation purposes. The issue of
deduction for tax purposes is intertwined with the main issue of
whether or not petitioner's benefits have been fully given her. It
is, therefore, a money claim arising from the employer-employee
relationship, which clearly falls within the jurisdiction 41 of the
Labor Arbiter and the NLRC.
2. Section 32 (B) (6) (a) of the New National Internal Revenue
Code (NIRC) provides for the exclusion of retirement benefits
from gross income, thus:
(6)Retirement Benefits, Pensions, Gratuities, etc.
a)Retirement benefits received under Republic Act 7641 and
those received by officials and employees of private firms,
whether individual or corporate, in accordance with a
reasonable private benefit plan maintained by the employer:
Provided, That the retiring official or employee has been in the
service of the same employer for at least ten (10) years and is
not less than fifty (50) years of age at the time of his retirement:
Provided further, That the benefits granted under this
subparagraph shall be availed of by an official or employee only
once. . . . .
Thus, for the retirement benefits to be exempt from the
withholding tax, the taxpayer is burdened to prove the
concurrence of the following elements: (1) a reasonable private
benefit plan is maintained by the employer; (2) the retiring
official or employee has been in the service of the same
employer for at least ten (10) years; (3) the retiring official or
employee is not less than fifty (50) years of age at the time of
his retirement; and (4) the benefit had been availed of only
once. 43
As discussed above, petitioner was qualified for disability
retirement. At the time of such retirement, petitioner was only
41 years of age; and had been in the service for more or less
eight (8) years. As such, the above provision is not applicable for
failure to comply with the age and length of service
requirements. Therefore, respondent cannot be faulted for
deducting from petitioner's total retirement benefits the amount
of P362,386.87, for taxation purposes.
INTERCONTINENTAL BROADCASTING CORPORATION (IBC)
vs. AMARILLA
G.R. No. 162775
FACTS:
On various dates, petitioner employed the respondents at its
Cebu station. The four (4) employees retired from the company
and received, on staggered basis, their retirement benefits
under the 1993 Collective Bargaining Agreement (CBA) between
petitioner and the bargaining unit of its employees.
In the meantime, a P1,500.00 salary increase was given to all
employees of the company, current and retired, effective July
1994. However, when the four retirees demanded theirs,
petitioner refused and instead informed them via a letter that
their differentials would be used to offset the tax due on their
retirement benefits in accordance with the National Internal
Revenue Code (NIRC).
The four (4) retirees filed separate complaints against IBC TV-13
Cebu and Station Manager Louella F. Cabaero for unfair labor
practice and non-payment of backwages before the NLRC,
Regional Arbitration Branch VII.
The complainants averred that their retirement benefits are
exempt from income tax under Article 32 of the NIRC. Sections
28 and 72 of the NIRC, which petitioner relied upon in
withholding their differentials, do not apply to them since these
provisions deal with the applicable income tax rates on foreign
corporations and suits to recover taxes based on false or
fraudulent returns. They pointed out that, under Article VIII of
the CBA, only those employees who reached the age of 60 were
considered retired, and those under 60 had the option to retire,
like Quiones and Otadoy who retired at ages 58 and 51,
respectively.
For its part, petitioner averred that under Section 21 of the NIRC,
the retirement benefits received by employees from their
employers constitute taxable income. While retirement benefits
are exempt from taxes under Section 28(b) of said Code, the law
requires that such benefits received should be in accord with a
reasonable retirement plan duly registered with the Bureau of
Internal Revenue (BIR) after compliance with the requirements
therein enumerated. Since its retirement plan in the 1993 CBA
was not approved by the BIR, complainants were liable for
income tax on their retirement benefits.
ISSUES:
(1) Whether the retirement benefits of respondents are part of
their gross income; and
(2) Whether petitioner is estopped from reneging on its
agreement with respondent to pay for the taxes on said
retirement benefits.
RULING:
(1) Yes; (2) Yes.
We agree with petitioner's contention that, under the CBA, it is
not obliged to pay for the taxes on the respondents' retirement
benefits. We have carefully reviewed the CBA and find no
provision where petitioner obliged itself to pay the taxes on the
retirement benefits of its employees.
We also agree with petitioner's contention that, under Section
28 (b) (7) (A) of the NIRC of 1986, the retirement benefits of
respondents are part of their gross income subject to taxes.
Sec. 28.Gross Income.
(b)Exclusions from gross income. The following items shall
not be included in gross income and shall be exempt from
taxation under this Title:
(7)Retirement benefits, pensions, gratuities, etc. (A)
Retirement benefits received by officials and employees of
private firms whether individuals or corporate, in accordance
with a reasonable private benefit plan maintained by the
employer: Provided, That the retiring official or employee has
been in the service of the same employer for at least ten (10)
years and is not less than fifty years of age at the time of his
retirement: Provided, further, That the benefits granted under
this subparagraph shall be availed of by an official or employee
only once.
Revenue Regulation No. 12-86, the implementing rules of the
foregoing provisions, provides:
(b)Pensions, retirements and separation pay. Pensions,
retirement and separation pay constitute compensation subject
to withholding tax, except the following:
(1)Retirement benefit received by official and employees of
private firms under a reasonable private benefit plan maintained
by the employer, if the following requirements are met:
(i)The retirement plan must be approved by the Bureau of
Internal Revenue;
(ii)The retiring official or employees must have been in the
service of the same employer for at least ten (10) years and is
not less than fifty (50) years of age at the time of retirement;
and
35
(iii)The retiring official or employee shall not have previously
availed of the privilege under the retirement benefit plan of the
same or another employer.
Thus, for the retirement benefits to be exempt from the
withholding tax, the taxpayer is burdened to prove the
concurrence of the following elements: (1) a reasonable private
benefit plan is maintained by the employer; (2) the retiring
official or employee has been in the service of the same
employer for at least 10 years; (3) the retiring official or
employee is not less than 50 years of age at the time of his
retirement; and (4) the benefit had been availed of only once.
Article VIII of the 1993 CBA provides for two kinds of retirement
plans - compulsory and optional.
Respondents were qualified to retire optionally from their
employment with petitioner. However, there is no evidence on
record that the 1993 CBA had been approved or was ever
presented to the BIR; hence, the retirement benefits of
respondents are taxable.
However, we agree with respondents' contention that petitioner
did not withhold the taxes due on their retirement benefits
because it had obliged itself to pay the taxes due thereon. This
was done to induce respondents to agree to avail of the optional
retirement scheme.
Respondents received their retirement benefits from the
petitioner in three staggered installments without any tax
deduction for the simple reason that petitioner had remitted the
same to the BIR with the use of its own funds conformably with
its agreement with the retirees. It was only when respondents
demanded the payment of their salary differentials that
petitioner alleged, for the first time, that it had failed to present
the 1993 CBA to the BIR for approval, rendering such retirement
benefits not exempt from taxes; consequently, they were
obliged to refund to it the amounts it had remitted to the BIR in
payment of their taxes. Petitioner used this "failure" as an
afterthought, as an excuse for its refusal to remit to the
respondents their salary differentials. Patently, petitioner is
estopped from doing so. It cannot renege on its commitment to
pay the taxes on respondents' retirement benefits on the pretext
that the "new management" had found the policy
disadvantageous. For petitioner to renege on its contract with
respondents simply because its new management had found the
same disadvantageous would amount to a breach of contract.
ATLAS CONSOLIDATED MINING & DEVELOPMENT
CORPORATION vs. CIR
G.R. No. L-26911
CIR vs. ATLAS CONSOLIDATED MINING & DEVELOPMENT
CORPORATION and COURT OF TAX APPEALS
G.R. No. L-26924.
FACTS:
In an appeal, where Atlas Consolidated Mining and Development
Corporation assailed the disallowance of the transfer agent's
fee; stockholder's relation fee; U.S. listing expenses; suit
expenses and provision for contingencies, as deductible
expenses from its gross income which resulted in the deficiency
income tax assessments made by the Commissioner of Internal
Revenue against Atlas, the Court of Tax Appeals allowed said
disallowed items except the stockholders relation service fee
and suit expenses. Both parties appealed by filing two separate
petitions for review, one filed by Atlas in L-26911 as to the
portion disallowed and the other by the Commissioner in L-
26924, not only raising for the first time lack of proof of
payment of the expense deducted but questioning as well the
allowance of said deductible expenses.
ISSUES:
1. WON the attys fees/litigation expenses paid in defense
of title tot he Toledo Mining properties purchased from
Mindanao Lode Mines Inc. in a civil case is an allowable
deduction as business expense under Sec. 30 (a)(1) of
NIRC.
2. WON the CIR can raise the fact of payment for the first
time on appeal.
RULING:
The Supreme Court ruled: in L-26911, that the stockholder's
relation service fee was in effect spent as a capital expenditure
and should be disallowed and in L-26924, that: (a) the
Commissioner of Internal Revenue cannot raise for the first time
on appeal the fact of payment of expense deducted; (b) the
listing fee which was paid annually is deductible as an ordinary
and necessary business expense; (c) the findings of the Court of
Tax Appeal on the "provision for contingencies" are factual in
nature and in the absence of grave abuse of discretion should
not be disturbed on appeal; and (d) litigation expenses in
defense of title of property are capital in nature and not
deductible.
Judgments modified as to taxable amount.
36